Gold rises in central banks with geopolitical tensions – 04/24/2023 – Market

Central bankers managing trillions in foreign exchange reserves are buying up gold as geopolitical tensions, including the Ukraine War, force them to rethink investment strategies.

An annual survey of 83 central banks, which manage a total of US$7 trillion in currency assets, revealed that more than two-thirds of respondents believed their peers would increase their gold holdings in 2023.

Gold tends to become more attractive in times of instability, and demand has skyrocketed over the past 12 months. The amount of gold bought by central banks increased by 152% in the year 2022, to 1,136 tonnes, according to the World Gold Council, a trade organisation.

A majority of reserve managers surveyed ranked geopolitical risk as one of their most important concerns – second only to high inflation – according to the HSBC Reserve Management Trends Survey, produced by Central Banking Publications.

More than 40% of respondents ranked it as one of their top risk factors, compared to 23% in last year’s survey.

About a third of respondents had changed or were planning to change the assets they acquire, due to tensions such as the Russian invasion of Ukraine and the worsening of relations between the United States and China.

Víctor Méndez-Barreira, author of the report, said Russia’s full-scale invasion of Ukraine had created a “factor that reserves managers now need to take into account”.

The invasion prompted the Western alliance of the United States, Britain and the European Union to impose extensive financial sanctions on Moscow, including measures to freeze some $300 billion in Russian central bank assets. The central bank’s gold reserves do not fall under the direct scope of the sanctions, as they are stored in Russia.

Figures from the World Gold Council show that many of the purchases made over the past year were made by central banks from countries that are not aligned with the West.

The People’s Bank of China [banco central chinês] bought 62 tonnes of gold in November and December 2022, bringing its total gold reserves above 2,000 tonnes for the first time. Turkey’s official gold reserves increased by 148 tonnes to 542 tonnes in 2022. Countries in the Middle East and Central Asia were also listed by the council as “active buyers” of gold last year.

John Reade, chief market strategist at the World Gold Council, said sanctions against the Russian central bank had “led many non-aligned central banks to reconsider where they should keep their international reserves”.

He added: “Countries have recognized that the gold that Russia holds, because it is outside the control of any other entity, is useful in situations where you cannot access any other reserves.”

Although Russia’s gold is stored in the country, many central banks keep their reserves abroad, for example at the Bank of England and the New York Federal Reserve, which reflects the status of London and New York as the largest gold trading markets. .

Gold was also seen as an effective hedge against high inflation — the number one concern of over 70% of respondents. The price of gold is now close to its highest face value after rising inflation through 2022.

Most respondents said the yuan would account for a larger share of international reserves during the remainder of this decade.

European Central Bank President Christine Lagarde warned in a speech last week that rifts between the United States and China threatened the dollar’s and euro’s leading positions in world reserve management.

According to IMF data, the dollar accounted for 58% of all central bank reserves during the fourth quarter of last year. The euro accounted for just over 20%, and the yuan just 2.7%.

The survey took place between February and mid-March 2023.

Translated by Paulo Migliacci