Central Banks Buy More Gold Regardless of Gold Prices

Guess What? Central banks are back in the gold market.

If you want to know where gold prices could be headed, don’t ignore the central banks. They’re like an elephant trying to enter a small swimming pool. No matter what, there will be spillovers, and it’s nothing but good news for gold bugs.

Digging into the details…

In 2020, central banks’ gold purchases slowed down a bit, but they were gold buyers, nonetheless. Why? Because they were too busy fighting the economic slowdown induced by the COVID-19 pandemic.

Now, they’re back to buying a lot more gold.

In the second quarter of 2021, central banks purchased 199.9 tonnes of yellow precious metal for their reserves. That was 214% higher year-over-year. It was also their highest gold purchase amount since the second quarter of 2019 when central banks purchased 227.8 tonnes. (Source: “Gold Demand Trends Q2 2021,” World Gold Council, July 29, 2021.)

In the first half of 2021, central banks purchased 333 tonnes of gold. That was 39% higher than the five-year average for the first half of the year. Impressive.

Here’s the kicker: it wasn’t the biggest central banks buying gold. They already have a lot of it. In the first half of 2021, Thailand, Hungary, and Brazil were a few of the biggest gold purchasers. Together, they bought 207 tonnes of gold for their reserves.

It has been the small central banks dominating the gold market for the past few years.

Russia’s Wealth Fund to Buy More Gold

Beyond this, Russia’s finance minister, Anton Siluanov, recently said that the country would be ditching the U.S. dollar and buying gold. This move comes after the Russian central bank had already been moving away from the dollar.

“We, just like the Central Bank, have decided to reduce the funds of the [National Wealth Fund (NWF)] invested in dollar assets,” said Siluanov. “Today’s structure has around 35% of the NWF’s funds invested in dollars. We have decided to fully withdraw from dollar assets, replacing investments in dollars by an increase in the euro, in gold.” (Source: “Dollar to Be Dropped From National Wealth Fund Structure Within One Month, Says Minister,” ITAR-TASS News Agency, June 3, 2021.)

What’s Next For Gold Prices?

Dear reader, in light of cryptocurrencies and the stock market being at an all-time high, gold definitely seems like a “boring” investment. But you really have to take seriously the issue of central banks buying gold for their reserves. It’s essentially a testament that they trust gold. These banks have been buyers of gold since 2010, and the price of gold doesn’t matter to them. Central banks just want more of it.

It’s very hard to imagine central banks reducing their gold buying anytime soon. Major currencies around the world (central banks hold an immense amount of currencies in their reserves) have become volatile. The national banks need something to anchor their reserves, and gold provides the solution.

As central banks remain in the gold market, I remain bullish on gold. Over the past few weeks, gold prices have come down a bit, but I’m not discouraged whatsoever. In fact, the lower the precious metal goes, the better opportunity it becomes.

Moreover, if gold has a great future, it may not be a bad idea to look at shares of gold mining companies. As gold prices have come down recently, investors have panic-sold some solid names in the mining sector. When the price of gold surges, don’t be shocked if mining stocks do really well.