Central banks have been steadily buying more gold since 2010. Last year, 2018, gold purchase peaked at 651 tons, which is 74% higher than 2017’s gold purchase.
Currently, the global central banks hold just about 33,200 tons of gold. This accounts for 17 percent of the world’s above-ground stock of gold.
This seems to be great news for the gold market, but what does this trend really imply for the economy?
A Quick Look at 2019 Gold Buying
The increase in gold buying continues in 2019. In fact, this first quarter of the year (Q1 2019), gold purchase has increased up to 68 percent compared to last year’s Q1 2018 gold purchase. Central banks purchased around 145.5 tons of gold this Q1 2019.
And now, this Q2 2019, the central banks purchased 224.4 tons of gold. This is a record-breaking high that will seem to continue in the next quarters and the next year.
What Drives This Change in the Gold Market?
There are two main drivers for this interesting change in the gold market.
1: Geopolitical and global economic uncertainties
Since the Global Financial Crisis in 2008 and 2009, the market central banks of smaller countries began to diversify their reserves to back-up their currency and domestic markets. One of the top choices for a back-up reserve was gold.
Before the global crisis, the US dollar remained as the global reserve currency. In the 1990’s and early 2000’s, most of the world’s reserves were backed by the US dollar reserve and other forms of reserves were overlooked.
So when trade tensions among large countries and economic powerhouses emerged, the global market and economy lopsided. The US dollar was no longer perceived to be the strongest currency to back international reserves.
And now, a decade after the Global Financial Crisis, the global economy still remains fragile. That’s why the increase in gold demand and gold supply also remained steady.
2: Intrinsic Value of Gold
The intrinsic value of gold as a reserve asset remains high, despite the economic changes throughout the past several decades. That’s why central banks returned to it when they diversified their reserves to back their domestic markets and economy.
Is the Return to Gold Really Good News?
This huge change in the gold market has several advantages for the global economy. The most notable benefits of buying and trading gold include:
- It is the perfect asset for reserve diversification to help increase economic security.
- Its value continues to grow despite changes in other assets’ values.
- It is highly liquid so it can be traded anywhere in the global market.
- It produces higher returns compared to other assets.
- It has no credit risks so it can give protection during times of crisis.
These benefits plus the security gold reserves offer to smaller countries’ domestic markets are enough to drive the return to gold. While other assets’ trading values remain volatile, gold remains solid and true.