Central Banks May Ramp Up Gold Buying

While they poo-poo gold or pretend it doesn't exist, global central banks have been quietly but aggressively accumulating gold bullion for several years now. The Central Bank of Russia, for example, has been a consistent buyer of gold.

Other major central banks have also been acquiring and holding the metal, although some scaled back last year following the pandemic and record-high prices for the metal.

Given more favorable market conditions and greater risks to holding U.S. dollar reserves, central banks may soon ramp up their gold buying again.

The Hungarian Central Bank cited “long-term national and economic policy strategy objectives” for its move.

The central bank also mentioned new risks that have developed as a result of the ongoing Covid-19 pandemic that has shaken the world.

The bank described gold as one of the most crucial reserve assets worldwide.

Central bank gold buying over the last decade helped support the price of gold. The sharp trend higher in central bank purchases did, however, come to a pause last year as record prices and the economic consequences of the global pandemic response took hold.

Central bank acquisitions got off to a slow start in 2021. But as the buying trend is resuming, these financial behemoths will likely become net buyers for the year.

Central Bank Gold

With global central banks not only buying but also holding so much physical gold bullion, it naturally begs the question of why.

There are several reasons that these powerful financial institutions look to add gold to their reserves. These include diversification, stability, and potential price appreciation.

Diversification

It is no secret that gold can add portfolio diversity.

The yellow metal tends to have a negative correlation to stocks and often moves inversely to the Federal Reserve Note “dollar” index as well. This means that as the value of equity portfolios declines or as dollar-denominated holdings lose value, the price of gold may rise, all or partially offsetting those losses.

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