Central banks have been hoarding gold since 2020, and for many the rush is a result of government economic stimulus plans during the pandemic, which has fueled record inflation in subsequent years.
However, as inflation returned to historical norms in most countries, central banks continued to stockpile gold even as inflation subsided, monetary policy was adjusted, and interest rates fell.
So should investors follow the lead of these institutions and go it alone? buying gold carousing? This analysis will show why central banks are buying so much gold, the benefits of buying gold now, and what to consider before the accumulation of precious metal.
Returning to the gold standard
For central banks, hoarding gold is nothing new. Actually, gold standard For decades, the US dollar was directly linked to gold. The gold standard was abandoned in 1931 by Britain, and the US followed suit in 1933.
Inflation still existed and was quite volatile during the period of the gold standard, but it eventually averaged out. Between 1880 and 1914, inflation averaged just 0.1%. This period coincided with America’s “classic gold standard”, but in some of these years the country experienced mid-single digit rates of inflation and deflation.
However, inflation rose at a faster rate as the US moved away from the gold standard. This reflects historical trends: many countries and empires throughout history have experienced soaring inflation after their currency became devalued from gold and relied on fiat currency instead of.
It is important to remember the gold standard when looking at the current rush to buy gold. Central banks can pump out more dollars while reducing the value of their fiat currency. Since gold has intrinsic value, its price will rise relative to the currencies that central banks continue to inject into the monetary system.
How much gold do central banks buy?
Central banks bought a record 1,082 metric tons of gold in 2022. These institutions also accumulated 1,037 metric tons of gold in 2023. And in 2024, central banks are now on track to beat the record set in 2022.
Central banks stockpiled 299.94 tons of gold in the first quarter of 2024, setting a record for gold purchases in the first quarter. A further 183.39 tonnes of gold arrived in the second quarter, representing the highest second quarter total since 2021.
In the third quarter of 2024, central banks bought 186.2 metric tons of gold, which represents a sharp year-over-year decline from gold purchases in the third quarter of 2023. However, according to the World Gold Council, demand for physical assets has more than doubled since last year.
Why are central banks buying gold?
Before the pandemic, central banks regularly accumulated gold, but its rise in recent years is noteworthy. There are several reasons why these institutions accumulate reserves of precious metals, including those listed below.
Rising inflation
Fiat currencies are losing value as governments print more money. While inflation has been the norm, the US printed more than $3 trillion in 2020, and other countries also put their money printers to work.
Higher inflation reduces the purchasing power of fiat currencies. Consumers have seen this first-hand as the cost of everything has increased in 2022. The annual inflation rate was 7% in 2021 and 6.5% in 2022, according to the U.S. Department of Labor.
Falling interest rates and tariffs could trigger inflation
Inflation rates have fallen since then. its peak is 9.1% in June 2022. The latest consumer price index, released in October, was 2.6%, in line with the pre-pandemic average. However, inflation could rise slightly as the Federal Reserve continues to cut rates, making two cuts already this fall and another cut likely during the December FOMC meeting.
Lower interest rates encourage more consumers and businesses to borrow capital. Loans and lines of credit increase the circulation of money, which leads to increased inflation.
While we are unlikely to see inflation challenge the highs set in 2022, inflation could rise as interest rates continue to fall. Additionally, President-elect Trump proposed tariffs This is expected to increase inflation in the short term, which could lead to higher gold prices.
Any potential federal income tax cut could offset the additional costs associated with tariffs, but a federal income tax cut would also increase inflation by pumping more money into the economy.
Global uncertainty
Global conflicts have increased uncertainty, making gold a more desirable asset. Many investors are returning to gold during tough economic times, and central banks may be trying to gain an edge.
Ongoing conflicts between Israel and Hamas, as well as Ukraine and Russia, have already contributed to rising gold prices over the past few years.
Should you buy gold like central banks?
Central banks have been buying gold for years in an attempt to diversify their holdings. The recent and sudden surge in gold purchases has brought more attention to the precious metal. In 2024, gold has outperformed the S&P 500 year-to-date and has favorable tailwinds from Federal Reserve rate cuts and global uncertainty.
However, inflation is falling and has returned to historical averages. Lower interest rates will likely lead to higher inflation, but it is unlikely that inflation will reach its 2022 high any time soon. Even as inflation peaked that year, gold remained a valuable asset, demonstrating its role as a store of value.
The intrinsic value of a physical asset remains unchanged even as central banks continue to print money. Gold is an important resource not only as a medium of exchange, but also in many commercial applications, including dentistry, jewelry, electronics, automobiles and other high-demand goods and services.
Gold will continue to rise in price as the money supply increases. The precious metal is time-tested and retains its value for thousands of years. However, investors should evaluate their risk tolerance and goals before accumulating gold.
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