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Central Banks Losses are Gold Gains

In the second half of 2022, the gold buying by central banks increased and pushed the total holding to the same levels as last witnessed in 1974. Since 2010 the quarterly demand for gold by central banks remained between 100-150 tons which increased post covid to 150-200t but in Q3 of 2022 it increased to 400 tons.

The largest contribution to this increase was from Turkey, Uzbekistan, India and Qatar with buying range from 15 to 32 tons. This momentum continued in November 2022 when the monthly buying came to 50 tons again with the new largest buyer Peoples Bank of China (PBOC) buying 32 tons.

The sudden demand rise for gold is based on the balance sheet and the reserves movements. If you look at a balance sheet of central banks then the main assets are government securities and currency. They are held in local and foreign currency.

Within the foreign currency, the major portion is driven by the US dollar and within the foreign bonds it is US Treasury. Both of them have seen a large rise in volatility in the past year along with a large fall in value for the holder in terms of the local balance sheet. This holds true for Central Banks as well, who are forced to sell both assets to restrict extreme movement in local currency. As it becomes the main driver of local inflation.

To provide some level of cushion to reserves and face the worst-case scenario of a recession with higher inflation in 2023, the central banks have turned to gold. Historically it has been proven to be a good strategic decision.


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