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Survey Results 2020: Gold Reserves In Central Banks

Gold Central Banks
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EDITOR NOTE: According to a survey in which several central banks across the globe responded, gold allocation targets remain constant and largely higher over the next 12 months. Most of us would think that the pandemic might have prompted central banks to accumulate more of the metal, but apparently, that’s not the case: their aim to bolster their gold reserves has been unwavering and in place since their respective countries have decided either to diversify against the US dollar or to de-dollarize altogether. The long-term outlook forUS de-dollarization based on central bank trends is one that signals an impending collapse. In contrast, the long-term outlook for gold sees further upside. And with the Fed aiming to raise inflation over the next few years, gold prices are likely to skyrocket, as investors seek safety against the impending plunge in their everyday purchasing power.

This article reports the findings of a joint survey of central banks carried out by Central Banking, with the support of Invesco, in August 2020. Those that took part did so on the condition that neither their names nor those of their central banks would be mentioned.

Executive summary  

  • The Covid‑19 pandemic has not, in the main, changed the view of central banks on gold, although almost one-quarter of respondents said they view gold as a more attractive asset.
  • Central bankers typically expect central bank gold holdings to increase over the next 12 months; no respondent expected a decrease.
  • When determining a central bank’s gold holding, the benefits of diversification stand out as the most relevant factor for reserve managers.
  • One in three central banks said they maintain a target allocation for gold: this rose to 39% of respondents when only those holding gold were considered.
  • Purchases in the global market are by far the most popular means of buying and selling gold, with derivatives second.
  • Overseas storage at a central bank is the preferred way to store gold: more than 80% of respondents said they did this.
  • Central banks are positively disposed to gold exchange-traded funds (ETFs), but active interest in investing is the preserve of a minority.
  • A combination of gold’s quality as a hedge against the US dollar and ETFs’ cost-effectiveness are the main benefits for holding ETFs.
  • Liquidity risk is the chief concern associated with holding gold ETFs, although larger holders say safety regarding physical gold is more of an issue.

The Covid‑19 outbreak has not changed how central banks see gold. This was the view of just over three-quarters of respondents, responsible for $2 trillion in reserves. Several respondents from this group noted that gold was an elemental part of their reserve management framework and as such was not impacted by market moves. A reserve manager from Asia explained: “Gold has been an integral part of our reserves regardless of market condition, and it may likely continue to be so.” A respondent from central Europe said their central bank remained committed: “We were very positive on gold in terms of the role it plays in any foreign reserve portfolio, even before Covid‑19, and that has not changed.” Another reserve manager from Europe had seen their view of gold’s strength in a crisis confirmed: “Gold is seen as a safe-haven asset in times of financial and political stress. Current market conditions have no impact on its strategic role in foreign reserves, other than to reaffirm the validity of the initial view.”  A contrarian view was offered by a reserve manager from Africa, whose central bank had yet to be persuaded on the benefits of holding gold: “In our view, gold does not provide a regular income, has high volatility and, with the Covid‑19 outbreak, its price has risen substantially, making it unattractive to buy for our portfolio.”

Six respondents did however say their central bank’s view had changed. The reserve holdings of this group ranged from $3 billion to more than $300 billion and they were mostly drawn from middle-income countries. In comments, two reserve managers, from Africa and Europe respectively, noted that an increase in the price of gold had strengthened its safe-haven status.

The benefits from diversification stand out as the most relevant factor for reserve managers in determining their institution’s holdings of gold. Just under two-thirds of respondents – a group of central banks responsible for $1.9 trillion, and with an average holding of $134 billion – said this was “very relevant”. This group, which included several large holders, was dominated by central banks from middle-income countries. It included over half the respondents from the Americas.  Low real interest rates also figure prominently in decision-making: just over 40% said this was very relevant. This group was also dominated by central banks from middle-income countries, and there was significant overlap with views on diversification benefits: all but one of the nine also said diversification benefits were very relevant. The nine were smaller reserve holders, however, holding $85 billion on average. Eight respondents reported that gold’s contribution to the risk of a portfolio was very relevant for their central bank, a group that contained several very large holders and was responsible for $1.4 billion. All eight also said that diversification benefits were very relevant.  A similar pattern was observed when looking at the central banks with gold holdings. Of the 18 that answered this question, 61% placed diversification benefits first, followed by low real interest rates (50%) and then contribution to portfolio risk (39%). 

Low real interest rates also figure prominently in decision-making: just over 40% said this was very relevant. This group was also dominated by central banks from middle-income countries, and there was significant overlap with views on diversification benefits: all but one of the nine also said diversification benefits were very relevant. The nine were smaller reserve holders, however, holding $85 billion on average. Eight respondents reported that gold’s contribution to the risk of a portfolio was very relevant for their central bank, a group that contained several very large holders and was responsible for $1.4 billion. All eight also said that diversification benefits were very relevant.  A similar pattern was observed when looking at the central banks with gold holdings. Of the 18 that answered this question, 61% placed diversification benefits first, followed by low real interest rates (50%) and then contribution to portfolio risk (39%).  Viewing the results through the prism of national income classification revealed a variation in views, however. Diversification benefits scored highest for reserve managers from high- and middle-income countries. Immediately below this, those from high-income countries placed more emphasis on the contribution to the risk of the portfolio, but for middle-income countries, low real interest rates matter more.  Just over half of respondents said “historical performance” was relevant, and several mentioned legacy or legal requirements in their comments. “Decline in oil prices” and “domestic political challenges” were not, however, seen as relevant for this group, and there was only marginal support for “weakening of the US dollar”, “Covid-19 pandemic”, “declining global growth” and “inflation risk”. 

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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