According to a recent report from the World Gold Council (WGC), about 21% of the world's central banks are planning to buy gold this year.
There are many reasons why Central Banks buy and hold gold. The reputation of the yellow precious metal as a means of diversifying the investment portfolio and its role as a safe haven are well known throughout the world. But gold's ability to increase risk-adjusted returns while serving as an important form of collateral for credit is a subject that is little discussed, but may be just as important. The WGC poll also showed that no central bank plans to sell its gold holdings this year, although 4% of banks were ready to do so last year.
“This year's review continues to highlight the high interest in gold on the part of central banks, and the coronavirus crisis highlights the importance of keeping liquid non-related assets in the reserve portfolio. Inflation is also seen as an investment factor and may affect the asset allocation of central banks in the coming years. We think that the Central Bank will remain net buyers of gold, albeit in smaller volumes than in previous decades, ”the WGC said in its survey.
The strong performance of gold during the coronavirus crisis is likely one of the main reasons for its purchases by central banks this year. Here are a few reasons why Central Banks around the world accumulate gold in reserves:
1. Gold is great diversification. It is not related to stocks or bonds and can improve diversification of the investment portfolio while demonstrating creditworthiness;
2. Gold is reliable and trustworthy. Gold has been a safe investment and protector of value for decades - and that reputation won't change anytime soon;
3. Gold fights inflation. Now that inflation is on the rise, it is more important than ever to own assets that are doing well at a time of rising prices. With the US Federal Reserve and other central banks around the world holding interest rates at or near zero and money being printed every month, the need for inflation insurance is more needed than ever;
4. Gold has no opposite side risk. The gold market is global and the metal is not associated with any counterparty risk. It cannot become bankrupt, insolvent or otherwise create problems for its owner. Gold is recognized and appreciated all over the world and is always accepted as a means of payment;
5. Gold can be used for interventions. Gold is the main currency, and the presence of gold in the reserves of the Central Bank gives it a powerful tool to intervene in the markets for specific purposes.
Takeaway: When gold is piled up by the world's largest and most powerful financial institutions, shouldn't you be doing the same?