Goldbug Season? Central Banks Turn to Gold to Combat Inflation

Central banks worldwide are increasingly acquiring gold as a strategy to combat inflation, according to a recent study by Invesco, an American independent investment management company. The 2023 Invesco Global Sovereign Asset Management Study, released in July, revealed that 85 sovereign wealth funds and 57 central banks are collectively managing an impressive $21 trillion.

The report highlights that in the face of persistent high inflation and real interest rates, investors are recalibrating their portfolios. As a result, central banks have been actively buying gold, storing it in vaults, and preparing for potential high levels of inflation. In 2022, these banks made record gold purchases, with a net acquisition of 1,136 tonnes. This marked the twelfth consecutive year of net increase in gold holdings for central banks worldwide.

China and Turkey were particularly aggressive buyers, accounting for 20% of the total gold acquisitions. However, other central banks, particularly in the Middle East and Emerging Markets, also demonstrated significant interest in gold. In fact, around two-thirds of central banks expressed the need to protect their portfolios from global inflationary trends, with 69% countering this risk through increased gold allocations.

Central banks unanimously view gold as a safe haven asset, citing its historical role as a store of value and inflation hedge. Additionally, concerns about the precedent set by U.S. sanctions make gold even more attractive. Unlike exchange-traded products such as futures, physical gold bullion remains the preferred choice among central banks.

Stablecoin issuer Tether has also recently touted its gold-backed asset XAUT as a hedge against inflation.

While central banks remain cautious about digital assets, Bitcoin has significantly outperformed gold in recent times. Since the beginning of the year, Bitcoin prices have surged by more than 80%, whereas gold prices have only managed a modest 4.6% increase over the same period. This performance has led some industry figures, including Balaji Srinivasan, the former chief technology officer of Coinbase, to note that hard assets like gold and Bitcoin are taking on a reserve role, while currencies like the Chinese yuan and Indian rupee are assuming trade roles as central banks reduce their dependence on the U.S. dollar.