While some international investors and financial analysts believe that gold investing could be used as a hedge against inflation, there are other claims that such measures are ephemeral.
But the latest report by gold hub revealed that some Central Banks across the world are gearing up to increase their gold reserves as one of their inflationary measures.
The 2022 Central Bank gold reserves survey revealed that 25 per cent of the apex banks have plan to increase their gold reserves up from 21 per cent in 2021.
The Central banks are also positive about using gold as a reserve asset as we sail through 2022, with 61 per cent of respondents being optimistic that the global gold reserves will increase over the next 12 months.
The preference for gold as a means of the reserve by both advanced economies and Emerging Market and Developed Economies (EDME) may not unconnected with the high inflationary rate across economies.
How the Apex Banks Buy Gold
The gold hub survey also asked respondents how they top up their gold reserves, more than half of respondents bought it on the global OTC market and for most advanced economies, “it is a historical legacy asset.”
The proportion of those buying gold on the global OTC market experienced an improvement from 43% in 2021 to 46% in 2022
OTC means Over-The-Counter. This happens when the trading of assets is carried out between two parties without the supervision of an exchange. OTC mark is also known as off-exchange trading or pink sheet trading.
Increase In International Reserves
The survey finds out that one of the factors behind the growth in international reserves of gold remains its use with 39% or respondents saying they use it “as a buffer against the balance of payments crises”.
For instance, in 2022, 74% of central banks reported higher total reserve levels than five years ago, an increase from 68% in 2021 and 53% in 2020 (Q1b, page 09).
Managing Gold Reserves
The report also shows that 76% manage gold separately from other reserve assets. It was 72% in 2021 while some manage gold as part of an investment tranche.
Specifically, most of the advanced economy central bank respondents say they manage gold separately from other reserve assets because it is a historical legacy asset while a large proportion of EMDE respondents viewed it as a strategic asset.
On why they manage their gold reserves separately, 6% of the respondents say they do because of the difficulties assessing it under their valuation frameworks.
The 31-page 2022 Central Bank gold reserves survey shows that 55% of the central banks use the Bank of England as their storage centre.
Effect of Russia-Ukraine Conflict
Some of the respondents believe that invasion of Ukraine by Vladimir Putin’s Russia would significantly affect the demand for gold in the days ahead.
“I think the sanctions on Russian due to the ongoing Russia-Ukraine conflict are going to increase gold demand and central banks’ holding of gold as a reserve asset to hedge against the currency risks. In my view, I think central banks will increase holdings of gold in their reserve portfolios.”Gold hub
On the role of USD, another respondent opined that the United State Dollar “will continue to be the dominant currency in international transactions”.
Russia invaded its neighbor, Ukraine, on Thursday, February 24, 2022, and international market analysts predicted that such action is going to negatively affect distribution of some commodities in which Russia have a comparative advantage in.
On one part, Russia’s sanctions and the ability of countries to freely access their USD holdings have raised many questions about USD liquidity and access in times of need.
2022 Central Bank gold reserves survey has indicated that central bank interest in gold will grow in the next 24 months as a result of an unpredictable economic environment characterized by the rising inflationary pressure and geopolitical instability.
For instance, the annual inflation rate grew to 8.6% in May 2022. It is the highest inflation rate USA ever recorded since December 1981, according to tradingeconomics.
Nigeria, which prides itself as the economic hub of Africa battled with 16.82% in April 2022, as a result of the increase in energy and food prices across the troubled country.
Will gold salvage the situation?
Gold Hub (June 8, 2022). Download “2022 Central Bank Gold Reserves Survey”. gold.org