Why central banks are driving in a new gold rush

Central banks globally have bought a record 800 metric tons of gold in the first nine months of 2023, up 14% from the same period last year. This surge in purchases is part of efforts by countries to hedge against inflation and diversify their reserves to reduce their exposure to the US dollar. Making the biggest move is China’s central bank, which has snapped up 181 tons of gold this year, taking its holdings of the yellow metal to 4% of its reserves. Chinese consumers have also taken a shine to gold, snapping it up as a potentially safe store of wealth in the face of a property crisis, a falling yuan, and tumbling yields.

The unrelenting pace of buying by central banks has helped bolster the price of gold, even as the US dollar and bond yields surge – both of which would normally lead to lower gold prices. See, like most internationally traded commodities, gold is priced in dollars. So when the dollar strengthens compared to other currencies, gold becomes more expensive for most of the world to buy – decreasing international demand. Rising bond yields, meanwhile, increase the “opportunity cost” of owning gold (instead of bonds) since the metal doesn’t generate income. In other words, gold looks less attractive when bonds offer better returns, and that causes its price to fall.

All in all, central banks could end up buying more gold this year than they did last year when they nabbed a record 1,081 tons. And that, combined with strong demand from Chinese investors, could nudge the price of the metal, which was trading around $1,985 on Monday, closer toward its all-time high of $2,072 a troy ounce.