An increasing number of countries are bringing their physical gold reserves back home to avoid sanctions similar to those imposed on Russia's foreign assets. At the same time, they are purchasing more precious metals as a hedge against high inflation.
A global survey of central banks by asset management company Invesco revealed that in response to high inflation and volatile bond prices, central banks and sovereign funds purchased a record amount of gold throughout 2022 and the first quarter of this year. Due to concerns over the U.S. and other countries' decisions to freeze Russian assets, central banks have chosen to purchase physical gold rather than derivatives that track metal prices or gold ETFs.
Amid escalating global tensions, central banks are increasingly preferring to store gold within their own countries. Invesco's survey found that 68% of central banks held a portion of their gold reserves domestically, a percentage higher than the 50% in 2020. The survey suggests that this figure is expected to rise to 74% within the next five years.
Rod Ringrow, Head of Official Institutions at Invesco, explained that until this year, central banks were more inclined to buy and sell gold through ETFs and gold swap transactions. However, this year, central banks are buying more physical gold. They prefer to store gold domestically instead of overseas or at other central banks, partially as a response to the freezing of the Russian central bank's reserves.
Last year, the West began imposing sanctions on the Russian central bank and prevented it from utilizing approximately $300 billion in overseas reserves.
According to the survey, conducted among 57 central banks and 85 sovereign wealth funds managing around $21 trillion in assets, many sovereign investors expressed "concern" over the precedent of freezing Russian assets. Ninety-six percent of respondents indicated that further investment in gold was due to its status as a safe haven.
A central bank governor from a Western country indicated that they had increased their exposure to gold eight to ten years ago and kept the gold in London for swaps and improved returns. However, they have now transferred their gold reserves back to their own country to ensure its safety - its current role is to act as a hedge asset.
Data from the World Gold Council shows that under the drive of central bank purchases and heightened interest from retail investors, global gold demand rose from 3,678 tons in 2020 to 4,741 tons in 2022, a new high in eleven years. However, despite strong demand for physical gold, gold ETFs suffered an outflow of nearly 300 tons of gold funds in 2021 and 2022.
Record gold purchases by global central banks in 2022 drove a strong increase in gold prices. However, due to the prospect of long-term increases in U.S. interest rates, gold prices have recently fallen back to around $1,920 per ounce.
As one of the main storage centers for global official financial institutions, the Bank of England's gold holdings have dropped by 12% from their 2021 peak to 164 million ounces in early June this year. This is another sign of the repatriation of gold to central banks globally.
