Latest / Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates / Why Central Banks Are Buying Gold Again
Transcript
- Lucas: So the World Gold Council's latest report shows central banks bought over a thousand tons of gold last year for the third year running. That's a pace we haven't seen since the 1970s, right after the US went off the gold standard. Luna: That's wild. And the first quarter of this year, maybe even faster? Lucas: Yeah, first quarter was on track for another record. And I think the instinct is to say 'inflation hedge, safe haven' — and that's part of it. But the bigger story is what gold does as a reserve asset when you're a central bank sitting on trillions of dollars. Luna: Right, because it's not like they're buying it to trade it. And you know, this reminds me — if you're someone who walks through the economy with us and things click a little more clearly, one of the best ways to keep this show ad-free and independent is a small contribution. You can do that at buy me a coffee dot com slash fexingo. It's a simple way to support the research we do. Lucas: Yeah, we really appreciate that. And honestly, even a coffee's worth helps. Luna: Totally. Okay, back to gold. So why are central banks so into it now? Lucas: So the key driver, I think, is diversification away from the dollar. For decades, the dollar was the default reserve currency — over seventy percent of global reserves in 2000. Now it's around fifty-eight percent. Gold is filling some of that gap. Luna: And it's not just a couple of countries. It's broad. Lucas: Very broad. China's been buying consistently for over a year, Poland's been aggressive, and even countries like Turkey and India are in. The World Gold Council says over eighty central banks bought gold last year — that's the most since they started tracking it. Luna: So what's the appeal of gold over, say, US Treasuries? Treasuries pay interest, gold doesn't. Lucas: Exactly. But gold has no credit risk, no political risk. When you're a central banker looking at geopolitical tensions, sanctions, or frozen assets — gold is the neutral asset. It's not someone else's liability. Luna: We saw that with the Russian central bank assets being frozen after the invasion of Ukraine. Lucas: That was a turning point. A lot of central banks, especially in emerging markets, looked at that and thought: if that can happen to Russia, it can happen to any of us. So they're buying gold because it's physically theirs. Luna: And it's not just about the dollar. It's about having an asset that isn't controlled by any one government. Lucas: Precisely. And the irony is, this actually reinforces the dollar's long-term position in some ways, because these countries are still holding a lot of Treasuries. But they're hedging. Luna: What's the size of the gold holdings now? Like, how much do central banks hold compared to before? Lucas: Central bank gold reserves are around 36,000 tons. That's about seventeen percent of all gold ever mined. And after selling heavily in the 1990s and 2000s, they've been net buyers since 2010. Luna: So it's a real reversal. What about the price? Gold's been hitting record highs lately. Has that slowed buying? Lucas: You'd think so, but no. Central banks buy for strategic reasons, not price. They have annual targets, and they stick to them. Even with gold above two thousand dollars an ounce, demand stayed strong. Luna: Interesting. So what does this mean for the dollar and for interest rates? Lucas: The dollar's share of reserves is down, but it's still the dominant currency. But if central banks are buying gold instead of Treasuries, that reduces demand for US government debt. That could push yields higher, which affects mortgage rates and borrowing costs for everyone. Luna: So it's not just a niche topic. It filters into the broader economy. Lucas: Exactly. And there's also the signaling effect. When a central bank buys gold, it sends a message about its confidence in the global monetary system. That's why it's worth watching. Luna: What about the gold market itself? Does central bank buying distort it? Lucas: Central bank purchases are about ten to fifteen percent of total gold demand. That's enough to move the market, especially when they're buying on a sustained basis. It's part of the reason gold prices have been supported. Luna: And it's not just the big players. We've seen smaller central banks like the Czech National Bank and the National Bank of Poland being quite active. Lucas: Poland's central bank governor has been very open about wanting to increase gold's share to twenty percent of reserves. That's a big target when you consider they started from almost nothing. Luna: I think that's a good example of how this isn't just about a few big economies. It's a broad shift. Lucas: And it's happening during a period when we have high inflation, geopolitical tensions, and concerns about fiscal sustainability in major economies. Gold is the asset that doesn't depend on any government's promises. Luna: So if I were to sum up: central banks are buying gold because they want to diversify away from the dollar, protect against geopolitical risk, and hold an asset that isn't a liability of another country. Lucas: That's a fair summary. And I think the key takeaway is that this is a structural shift, not a cyclical one. It's not going to reverse just because gold prices dip or inflation cools. Luna: Where do you see this going in the next few years? Lucas: If the trend continues, we could see central bank gold reserves rise to forty thousand tons by the end of the decade. That would have big implications for the global financial system, the dollar's role, and how we think about money itself. Luna: It's one of those quiet forces that most people don't think about, but it shapes the world we live in. Lucas: Yeah. And the next time you hear about gold prices hitting a record, you'll know there's more to it than just investors.