In 2022, central banks bought the most gold since 1950. It wasn't a spur of the moment thing nor a rash decision: they had been stockpiling gold for more than a decade. And while the year had its flare-ups, namely in the form of Russia's invasion of Ukraine, was it really worse than the previous two?
So the question one might ask is: why?
To understand why global central banks bought that much gold last year, we'll have to analyze why they started buying gold again to begin with. And from there, we'll have to go over how central bank gold buying changed from a fringe activity to a necessity.
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2010 triggers the start of net central bank buying
In 2010, the gold market saw one of the most dramatic shifts in market dynamics as central banks turned from net sellers to net buyers. What this means is that, in total, the official sector combined would buy more than it would sell. But this hardly tells the whole story.
While selling might have been popular for two decades prior to 2010, or more specifically prior to 2008, it became a crisis thing from 2010 and onwards. From that point, it became increasingly uncommon to see a country sell all or some of its total gold holdings unless they found themselves in a localized crisis. Russia and Turkey are two examples of that, and we'll get to them soon enough.
Why was the shift so dramatic? Because just based on the amount of purchases, central banks are actually the primary source of gold demand. It might look like it's wealthy investors or even COMEX, but you can't really beat multi-ton purchases in a given year unless you're a sovereign nation.
If we apply any kind of supply-and-demand dynamic to the gold market, which we should, this has to be seen as one of the turning points for gold. The reasons for the shift should be obvious, as it happened in the middle of the global financial crisis.
But while central banks might have been inclined to part with their gold for liquidity in 2008, 2010 saw a change in sentiment. However, this was only the start of the saga of renewed central bank gold demand, one that would cause them to purchase as many as 1,136 tons within a single year.
2010 to 2014: Emerging market nations are catching up
A story from 2014 on Kitco reminds us that, technically, central banks had already begun buying gold in 2009. Using data from the World Gold Council and the International Monetary Fund, it shows us why 2010 was a turning point towards accumulation across the board.
It also highlights some important points. For what seemed like the longest time, central bank gold buying seemed like a sort of emerging market quirk. After all, who were the top buyers back then? As the article notes, Russia and China, followed by India, Thailand, Mexico and Kazakhstan. The relative weakness of these economies almost made the story seem irrelevant to the casual observer.
Why weren't the U.S. or Germany buying gold? Because in 2014, the U.S. held 72.1% of its reserves in gold, and Germany 67.8%. In what now seems like an obvious error, Kitco says these stockpiles were "a legacy of the gold standard." If that were really true, the incredibly indebted U.S. would have sold its historical legacy asset long ago.
For reasons that we'll soon go over, central banks of these emerging market nations were trying to do two things:
1. Establish their sovereignty because gold allows a nation to do just that, and
2. Shield themselves from crises and sanctions
While the latter might have seemed like some kind of paranoia-driven motive, we will soon see how it was not only the right call, but that other nations are now following suit. Cue Russia.
2015 to 2018: Russia evades sanctions by becoming a top gold holder
Remember, we're still in 2015. There's no BRICS, SWIFT is the be-all-end-all permanently, and U.S. sanctions are not to be questioned. Between 2015 and 2018, Russia became the fifth-largest gold holder in the world after not even being on the list in any relevant way in 2009. It bought gold month after month, quarter after quarter and year after year.
The reasons couldn't have been more apparent. The U.S., perhaps wary of critics who panned its military inventions, turned to the financial system to essentially attack a country. Now, to be clear, one has to make a real effort to portray Russia as the good guy here.
The sanctions came about as a result of a military invasion, with Russia gradually attempting to absorb the country of Ukraine into itself primarily through the use of gunpowder. But however well-intentioned the U.S. might have been, it weaponized something that should be neutral, which is the financial system.
This put things in motion that would only worsen as Russia launched a more brazen attack. Even to countries that care little for Russia or its dealings, it signaled that the U.S. might do the same to them one day if they do something deemed inappropriate.
This brings us to the most exciting chapter of the timetable, which is the present stretch.
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2019 to present: Central banks buying gold like it's the 1800s
When the sanction-ridden, oil-dependent economy of Russia buys gold, or the hyperinflated Turkey, the motives are clear. They want insurance and stability in the absence of either, and gold provides that. But from 2018 and especially 2019, other central banks began adding to their reserves in a manner that was conspicuous.
Hungary, Poland and the Czech Republic are far removed from countries on the 2009-2014 list. Their economies are more stable, partly due to being in the European Union. And also because of that alliance, they don't, in theory, need the kind of one-size-fits-all shielding that gold provides to a country like Mexico.
As we get to some choice quotes from these nations, we'll understand why seemingly everyone without a large gold hoard is trying to get one. A good introduction to this would be to simply list the top 10 gold holders, which have barely changed since 2009, and those are:
1. The U.S.: 8,133 tons
2. Germany: 3,359 tons
3. Italy: 2,452 tons
4. France: 2,436 tons
5. Russia: 2,299 tons
6. China: 2,136 tons
7. Switzerland: 1,040 tons
8. Japan: 846 tons
9. India: 754 tons
10. Netherlands: 612 tons
Six of these are Western powers of sorts: they have tremendous clout and say on the global stage. Japan is like the Asian version of Germany, though more isolated: a highly developed industrial nation. We've covered Russian foreign exchange reserves, and will soon cover China, which leaves the difficult-to-categorize India. But as the currently most populous nation in the world, it should be clear why India is on the list.
How big of a coincidence is it that the most geopolitically involved, if not to say relevant countries, have the biggest gold stockpiles? And is it a coincidence that the U.S., the global superpower, has an official hoard of over 8,000 tons that no other country comes close to matching?
An exceedingly overlooked difference between European and Asian banks is therefore a simple one: Asian banks tend to be very underweight on gold.
As we get into BRICS and China, it increasingly starts to look like the precious metal was never that removed from the financial system.
Russia gets SWIFT banned, nations take note and China sees an opportunity
De-dollarization is such a common term these days that we almost hesitate to mention it. Suffice to say that cutting off Russia from the Western banking system sent a message to every nation in the world, even Western allies. Who's next?
Even Western allies have clearly taken note, but those who aren't closest to the U.S. started looking for a solution of their own. As it was cut off from SWIFT, Russia halted oil and gas exports to Europe, saying it'll only trade with "friendly" nations and plunging Europe into an energy crisis.
On the back front, an alliance was seemingly formed between Russia and China, but in truth, they aren't meant to be equals. China has wanted to either take the U.S.' place or have an equal say in global affairs for a very long time.
Weakening the U.S. dollar and introducing an alternative is a key component for this. However, the yuan is the problem. Back when we first heard about CBDCs, the narrative was as follows: China is rolling out the digital yuan tomorrow, so the U.S. must follow suit to not have China become the global superpower.
These days, more and more people see CBDCs for what they are, so it's a tough sell. And the yuan is basically a less stable, less reputable greenback. Why, exactly, would anyone trade in it instead of the greenback?
Here is where BRICS gets a brief, but needed mention.
The BRICS alliance: can it work without gold?
Brazil, Russia, India, China and South Africa, or BRICS. These countries, along with 40 already signed-up allies, want to form an alternative to SWIFT. Some believe that over 80% of the world's nations might want to join this alliance soon.
They'll need such numbers for one simple reason: with the exception of perhaps some Middle Eastern nations, all of these have a very low standard of living compared to the West. They have free-floating currencies that simply can't look more appealing than the U.S. dollar unless they're tethered to something.
While oil has been thrown in the picture, gold would be a likelier candidate for a currency to take the dollar's place in commerce. But wouldn't the U.S. still be the superpower of choice since it has the biggest gold hoard?
It's enough to refer to reports that Russia could have as much as 10,000 tons of unreported gold, and China 20,000 tons, to see how a gold-backed BRICS currency could quickly usurp the current state of affairs.
Gold as a symbol of a nation's power
Poland bought an almost ridiculous 100.1 tons of gold in 2019, bringing the hoard to 230.84 tons in December 2021. Poland is a small nation. Russia, which isn't, held "only" 550.12 tons in 2009.
The wealthy nation of the Netherlands, in comparison, has had 612 tons of gold for over a decade. Does Poland want to be seen as "one of those" nations, having a bigger say in geopolitical affairs, in a world whose economy is returning to gold? After all, it was the Governor of Poland's central bank, Adam Glapinski, who provided us with this choice quote:
"The gold symbolizes the strength of the country," following the 100-something ton purchase.
There are so many other hints and examples worth mentioning to corroborate this point that we have to stick to the few that really stand out. In 2017, still some ways off from the current state of elevated geopolitical tensions, Germany repatriated its gold in what was a surprise to many.
Then there is this from Patrick A. Heller, as he analyzed the prospects that the Federal Reserve leased out its gold and doesn't have it:
"Any evidence that the Fed has far less gold reserves than it has been reporting would immediately harm the U.S. dollar and push up the price of gold."
Also dated 2017, long before the talk of "usurping the U.S. dollar hegemony" got serious.
And then we get to Russia's own example. Whether we like it or not, Russia's rapidly-ballooned total reported gold reserves of over 2,000 tons essentially allowed it to bypass sanctions to some extent. This crisis fund did exactly what it's supposed to, allowing the nation to act with force in the face of sanctions that would otherwise cripple a country with a more SWIFT-oriented portfolio.
Investing like a billionaire made easy, through gold
"Invest like a millionaire" and, from there, "invest like a billionaire" are very popular search trends. People see a portfolio that does well and want to copy it. But in doing so, they often neglect the richest entities in the market, those being sovereign countries.
And it seems that the trend is for countries to have anywhere between 10% to 70% of their reserves, or assets, in gold. In turn, individual investors are advised that even a 10% portfolio allocation to gold might make them a gold bug and is far too high to be considered standard.
Countries and their central banks stockpile gold for the same reasons that individual investors should. When push comes to shove, it's usually the asset to be in. But as outlined above, there are far more nuances to gold investment these days than simple protection.
If gold gets more official nods, as it has recently, it will prove ill-advised to not have a decent exposure to it as we move into uncharted economic waters. For more information on how to diversify your savings with physical gold and silver, request your Wealth Protection Guide from Goldco here.