Soon, we’ll have the final numbers for 2022, but we already know that the net amount of gold bought by central banks will almost certainly be more than the 656.2 tonnes bought in 2018.
According to the World Gold Council, the amount of gold bought by central banks in 2018 was the second-highest on record and the highest since 1971, when the dollar could no longer be turned into gold.
According to data collected by the WGC, central banks bought nearly 400 metric tonnes of gold in the third quarter of 2022 alone. This was 300% more than Q3 2021, and it was the largest quarterly increase in central bank gold reserves since the World Gold Council started keeping records in 2000.
Along with the usual purchases, there were big increases in gold holdings in Q3 that were not reported. China and Russia both have central banks that don’t report purchases as often as they should. Many analysts think that the mystery buyer was China, which was stockpiling gold to protect itself from the dollar.
The People’s Bank of China then announced in November that it was buying gold for the first time since 2019.
Why do central banks buy so much more gold than they used to?
In an article for the Mises Wire, economist Daniel Lacalle suggested a few things.
First of all, most central banks keep most of their cash reserves in the form of US Treasury bonds, which are dollars. Since the US government uses the dollar as a weapon, many countries would like to be less reliant on it. Many analysts think that China is buying gold to lessen its reliance on the dollar.
Lacalle said that holding dollars might have been a stabilising factor in 2022, but that could change “if the next ten years bring a wave of money devaluation that has never happened before.”
Lacalle also talks about the slow but steady move toward digital currency issued by central banks. He says that this would completely change how money works.
By putting digital currency directly into a citizen’s account at the central bank, the bank would have full access to savers’ information and, more importantly, would be able to speed up the transmission of monetary policy by getting rid of the banking channel and the backstop of credit demand, which keep inflation from going up. The way monetary policy is passed on is always slowed down by the need for credit in the banking system.
This has kept inflation from going up much more. This has caused the prices of financial assets to go up a lot, and when the increase in the money supply was used to pay for government spending and subsidies, prices went through the roof.
If central banks start issuing digital currencies, the loss of purchasing power seen in the last fifty years will be very small compared to what can happen when central banks have complete control.
In this kind of situation, gold would be the only way to store value.
Lacalle said that we could be headed for a time of financial ruin that has never happened before. This is another reason to have gold.
The Financial Times recently said that the falling value of bonds on the balance sheets of central banks is already costing them a lot of money.
The Federal Reserve lost $720 billion in the first half of 2022. Losses of this kind have been reported by other central banks. So, they will have to fill in the space. Lacalle says that central banks can ask their governments for help, which means they can ask the people who pay taxes.
The wave of monetary destruction that could be caused by a new record for global debt, huge losses in the central bank’s assets, and the creation of digital currencies could only be stopped by gold, which has been used as a store of value for centuries. This is because the central bank knows that governments won’t stop spending too much money.
Lacalle asks, “Why do central banks buy more gold when their balance sheets show that they have lost money?”
His answer was to build up their reserves, cut down on losses, and figure out how new digital currencies might affect inflation. Since buying European or North American government bonds doesn’t make it less likely that you’ll lose money if inflation stays high, buying more gold is probably the only real option.
… Then why do people buy gold? Years of too much easing have had terrible effects on the economy and the money, which will lead to a new policy paradigm that is bad for both our real earnings and our savings deposits.
Central banks have been forced by governments to choose “financial repression” when given the choice between “sound money” and “financial repression.”
“The only reason central banks buy gold is to protect their balance sheets from the programmes they have in place to destroy money.” “They have no other choice.”