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World Bank Analysis Reveals Why Central Banks Are Increasingly Buying Investment Gold

The record-breaking price of gold is almost ceasing to be surprising news. In early April, gold broke historical records for the second time this year, surpassing the $2,250 per ounce mark. Gold thus concluded an outstanding month, rising by as much as 8 percent! The key reasons for the price increase remain the same: geopolitical instability, economic uncertainty, and the announced reductions in benchmark interest rates that could signal the introduction of quantitative easing programs. In other words, an increase in money supply, which could lead to inflation. In such circumstances, investors consider gold the best safeguard for their assets.

 

Central Banks Profiting from Gold Growth

 

Higher gold prices bring satisfaction to investors worldwide, and among those who have the most reason to celebrate are the heads of central banks. Namely, in recent years, central banks have been the largest buyers of investment gold bars, increasingly replacing traditional currencies, especially the dollar, in their reserves. A recently published World Bank report has revealed the reasons behind this strong de-dollarization and growth in gold reserves.

 

 

The publication “Gold Investing Handbook for Asset Managers,” authored by Kamol Alimukhamedov, Deputy Managing Director of the Central Bank of Uzbekistan and a Member of their Investment Committee, provides a comprehensive overview of gold as an investment option. The handbook also offers a clear analysis of the growing trend among central banks, which is leading to a reduction in dollar reserves and an increase in gold reserves.

 

“In the modern era, gold continues to play a critical role in the global financial system, serving as a hedge against inflation, a safe haven asset, and a reserve asset for central banks. The role of gold as a reserve asset for central banks has been a significant driver of demand for the precious metal. “The market disruptions brought about by the 2008 Global Financial Crisis (GFC), the US and China trade war, Brexit, and the COVID-19 pandemic, as well as a prolonged period of negative real interest rates and geopolitical uncertainties caused by financial sanctions imposed on Russia to freeze its foreign reserves, reinforced the strategic importance of gold as a buffer against financial instability.” Alimukhamedov stated in the analysis.

 

Threat of sanctions fuels gold purchases

 

The experienced banker highlighted how, since 2022, central banks worldwide have become increasingly interested in increasing their gold reserves. However, since the beginning of the global financial crisis in 2008, central banks have been increasing their holdings, buying more gold than they sell on an annual basis. In the last two years, this “net positive” attitude towards gold has significantly increased.

 

“The largest increases in gold holdings by central banks often occur when the banks anticipate or face financial sanctions. The study’s econometric analysis revealed that both the volume and the value of gold reserves tend to rise in response to sanctions imposed by major economies such as the Euro Area, Japan, the United Kingdom, or the United States“ Alimukhamedov noted.

 

 

 

Alimukhamedov also believes that the current behavior of central banks could herald a new financial paradigm globally, where gold bars will represent the dominant reserve.

 

“There is an argument that, in the aftermath of Russia’s supply-side crisis and the sanctions imposed on Russia, the world is transitioning from the Bretton Woods era, which was backed by gold bullion, to Bretton Woods II, which was backed by inside money (treasuries with unhedgeable confiscation risks), to Bretton Woods III, which was backed by outside money (gold bullion and other commodities)” the author writes.

 

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