The largest gold buyer in the world is China, while the United States, Germany, and Italy have accumulated the most gold. The National Bank of Poland is also very active in acquiring gold, with gold’s share in its reserves exceeding 10%. In the second quarter, Poland bought more gold than China, and in the third quarter, it was second in terms of purchases. The demand from central banks keeps the price of gold stable despite high interest rates, bond yields, and a strong dollar, which are typically unfavorable for gold.
Central banks influence gold prices in two ways. On one hand, by regulating interest rates – traditionally, interest rate hikes should reduce gold’s attractiveness and lower its price, but this has not been observed. For the past three years, gold prices have been challenging their historical maximum, and the rate hikes have not weakened gold. On the other hand, central banks positively influence gold prices due to their record purchases for foreign exchange reserves.
According to the World Gold Council, central banks bought a total of 800 tonnes of gold in the first three quarters of 2023, 14% more than in the same period of 2022, which was already higher than the previous decade’s average. China leads the purchases with 180 tonnes, followed by the National Bank of Poland, which started buying in April and increased its gold reserves by 100 tonnes by the end of September. Singapore is third, slightly exceeding 70 tonnes.
Central banks’ demand this year is record-breaking. If this trend continues in the fourth quarter, it will be a historically high year for gold purchases. The National Bank of Poland has significantly increased its gold reserves in recent years, from 100 to over 300 tonnes, making gold account for more than 10% of its reserves, a healthy and desirable level.
The record demand from central banks has kept the gold price around $2,000 per ounce, up about 18% over the year, despite several unfavorable factors. Historically, rising global interest rates and bond yields caused gold prices to fall, as U.S. bonds became a safe alternative with a high coupon compared to gold, which does not pay interest.
Rising consumer prices and currency depreciation in many markets have led to a surge in interest in gold as a value carrier. Central banks’ rush towards gold also stems from a desire to reduce dependence on the U.S. dollar as a reserve currency, especially by China, after Washington used the dollar as a weapon in its sanctions against Russia. China is also shedding U.S. bonds for this reason, as Russia did before its attack on Ukraine.
The United States has the largest gold reserves, well over 8,000 tonnes, followed by Germany, Italy, and France combined. Poland, with its 334 tonnes, ranks 16th.
Central banks worldwide aim to have gold account for 10-20% of their reserves, a desired level for most central bankers. There are exceptions, especially for reserve currency issuers like the U.S. dollar and the euro (European Central Bank), where the gold share is higher. For central banks like Poland’s, most reserves are held in dollars and euros, particularly in treasury bonds of the countries issuing these currencies, with gold comprising about 10-20% of the reserves.
