Central banks have shown a strong and consistent interest in buying gold in recent years. UBS’s latest report emphasizes the ongoing appeal of gold for central banks, highlighting its role as a hedge against inflation, a diversification tool during market volatility, and a reliable asset in times of economic uncertainty.
In light of the Ukraine conflict and the freezing of around $300 billion of Russian foreign assets, central banks, especially those from smaller nations vulnerable to Western sanctions, have been increasing their gold reserves.
While this trend may not immediately impact the dominance of the US dollar, it does reflect a changing perception of central bank independence and adds momentum to calls for reform in the global financial system.
By the end of 2023, central banks collectively held approximately 37,000 metric tons of gold, accounting for 16.7% of their total foreign exchange reserves. Developed countries like the United States, Germany, Italy, and France hold the largest reserves.
However, emerging markets such as Russia and China are rapidly boosting their gold holdings, signaling a shift towards diversification and reduced dependence on major currencies like the US dollar, euro, Japanese yen, and British pound.
According to UBS strategists, these acquisitions align with a broader strategy to enhance asset diversification and minimize exposure to currency risks.
The World Gold Council’s survey of reserve managers underscores gold’s enduring value as an inflation hedge, its lack of counterparty risks, and its high liquidity, which are particularly valuable in times of escalating public debts.
Discrepancies in reported gold purchases, particularly between the IMF and other sources, point to the challenges of accurate reserve disclosures and the likelihood of underreported gold acquisitions by sovereign wealth funds.
UBS notes that historical trends indicate central bank actions can significantly impact gold prices. In today’s more liquid and diverse market, central banks’ increased gold purchases are likely to have lasting effects on the precious metal’s value.
“Looking ahead, central bank demand is expected to remain robust for gold. Additionally, a weaker US dollar outlook may prompt emerging market central banks to intervene in currency markets, potentially driving up gold demand even further,” UBS stated.
UBS maintains a positive outlook on gold, citing central bank demand, geopolitical tensions, high inflation, and the possibility of lower US interest rates as supportive factors.
The Swiss brokerage firm forecasts gold prices to reach $2,600 per ounce by the end of the year and $2,700 per ounce by mid-2025, recommending a 5% gold allocation in a USD-based balanced portfolio for individual investors.