Central banks around the world, including Turkey, India and Poland, are increasingly turning to gold to hedge against the volatile economic landscape and geopolitical risks such as the war between Russia and Ukraine.
Gold rush at the central banks
Factors that influence the gold market include the strength of the US dollar, inflation rates and demand for gold jewelry. Purchases by central banks, especially those of major economies, also have a significant impact on the price of gold.
- In the second quarter of 2024, global central bank gold demand amounted to 183 tonnes, up 6% from the same period last year but down 39% from the previous quarter.
- Due to increasing demand from central banks and private investors, the price of gold rose to over $2,500 per ounce during this period.
Which countries are obsessed with gold?
- Poland: Poland has become the leading buyer of gold, with the National Bank of Poland (NBP) purchasing 19 tonnes in the second quarter of 2024, increasing its reserves to 377.4 tonnes. This move is in line with the NBP’s strategy to expand gold to 20% of its reserves, up from the current 14.7%, as Governor Adam Glapinski outlined.
- Türkiye: The Central Bank of the Republic of Turkey (CBRT) has increased its reserves by 15 tonnes of gold in the second quarter of 2024, bringing its total gold purchases for the year to 45 tonnes. This move underscores Turkey’s commitment to strengthening its financial security through gold in the face of ongoing economic challenges.
Who is an outlier: Turkey is among countries that are significantly increasing their gold purchases, including India, Jordan, Qatar and Russia. China, on the other hand, reduced its gold purchases in the second quarter, raising questions about its long-term strategy amid ongoing geopolitical challenges.
Why do central banks buy gold?
- Economic shield: Central banks are increasingly turning to gold to protect themselves against economic instability and geopolitical risks. Gold’s stable performance in times of crisis and its role as a hedge against inflation make it a preferred investment.
- Regional security concerns: In Poland, the increase in gold purchases is partly due to concerns about regional security, particularly the potential escalation of the Russia-Ukraine conflict and the Israel-Hamas conflict. Similarly, Turkey’s strategic gold accumulation reflects a broader effort to hedge against potential economic disruption.
- Diversification: Gold not only serves as a safe haven for central banks, but also allows them to diversify their reserves away from traditional assets such as currencies, which can be more volatile in uncertain times.
What do experts say?
- Market analysts such as Grzegorv Dróżdż of Conotoxia believe that while the price of gold may decline slightly by the end of the year, it is likely to remain above $2,500 per ounce. The continued weakening of the US dollar could further strengthen gold’s performance relative to other assets.
- Central banks, including Turkey, are likely to continue their gold-buying spree as part of a broader strategy to protect their economies from global economic uncertainties and reduce dependence on dominant currencies such as the U.S. dollar.
- This confluence of factors – from Turkey’s efforts to stabilize the lira to strategic gold purchases by central banks around the world – highlights the complex dynamics at play in the current global financial environment.
