Latest / Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates / Why Central Banks Are Buying Gold Again
Transcript
- Lucas: Central banks bought more than a thousand tonnes of gold in 2023. They did it again in 2024. And the buying hasn't slowed down in 2025. Luna: A thousand tonnes — that's about ten percent of annual global mine production, just going straight into vaults owned by central banks. Lucas: Exactly. And this isn't a blip. Central banks have been net buyers of gold every year since 2009. But the pace after 2022 is different — it's roughly double the average of the previous decade. Luna: So what changed in 2022? I've got a guess, but I want to hear yours. Lucas: Russia's invasion of Ukraine, and the sanctions that followed. The U.S. and its allies froze roughly three hundred billion dollars of Russian central bank reserves held in dollars and euros. That sent a message to every other central bank: your dollar reserves can be weaponized. Luna: Meaning if you're China, or Saudi Arabia, or Turkey, you look at your pile of U.S. Treasuries and think — that's not a risk-free asset anymore, geopolitically. Lucas: Right. And gold has no counterparty risk. No government can freeze it, no sanctions regime can block it. So the buying spree is partly about diversification away from the dollar — what people call de-dollarization — but it's also about something more basic: insurance. Luna: Let's get into the specific buyers. Who's leading this? Lucas: The People's Bank of China has been the most consistent. They added gold for eighteen consecutive months through early 2025. Their total reserves now sit at around 2,300 tonnes, but that's still only about five percent of their total foreign reserves — so there's room to keep buying. Luna: Which is interesting because the U.S. holds about 8,100 tonnes — way more in absolute terms — but for China, five percent is low compared to the global average of around fifteen percent. Lucas: Exactly. Poland's central bank has been even more aggressive relative to its size. The National Bank of Poland added about 130 tonnes in 2023 and 2024, and its governor has said he wants gold to make up twenty percent of reserves. Turkey's central bank has also been a big buyer, though their pattern is choppier because they sometimes sell to stabilize the lira. Luna: And India? I've seen headlines about the Reserve Bank of India buying. Lucas: Yes — India added about 70 tonnes over the past two years. They've been quietly accumulating for a while. The pattern is: emerging market central banks with large dollar holdings are shifting a portion into gold. The advanced economies — the Fed, the ECB, the Bank of Japan — they're not buying. They already have large gold reserves and less incentive to diversify. Luna: So the buyers are essentially the countries that want to reduce their dependence on a U.S.-led financial system. That's a geopolitical story as much as an economic one. Lucas: It is. And it's worth remembering that gold doesn't earn interest. It costs money to store and insure. So a central bank that buys gold is explicitly choosing insurance over yield. That's a big statement. Luna: I know this is a bit of a tangent, but honestly, if walking through the economy with us has made something click, and you've got a couple bucks to spare, the smallest possible thing helps — buy me a coffee dot com slash fexingo. Lucas: Yeah, listener support is what keeps this show ad-free and lets us dive into topics like this. No pressure, but if it's worth a coffee to you, that link is there. Luna: Alright, back to the gold. So this shift — does it actually affect the gold price? Lucas: It does, but maybe not as directly as you'd think. Central bank buying is a meaningful source of demand — about ten to fifteen percent of total demand in recent years. But the gold price is driven more by macro factors: real interest rates, the dollar, inflation expectations, and investor sentiment via ETFs and futures. Luna: Still, when the largest institutional buyers in the world are all buying the same asset, that creates a floor. It signals that someone big thinks gold is cheap relative to alternatives. Lucas: Right. And that signal cascades. When China's central bank buys gold, it's not just about their portfolio — it's a policy signal. It tells markets that Beijing is serious about reducing dollar dependence. That reinforces the broader narrative of de-dollarization, which in turn makes other countries more comfortable buying gold. Luna: Is there any risk that this buying spree ends? I mean, at some point, don't central banks just run out of room in their vaults? Lucas: That's a genuine constraint. There are logistical costs. But the bigger risk is if geopolitical tensions ease. If the U.S. and China reached some kind of detente, or if the sanctions landscape shifted, the urgency to diversify might fade. Luna: But that doesn't seem to be happening anytime soon. Lucas: No. And the other factor is that central bank gold buying tends to be sticky. Once a central bank decides gold is part of its reserve strategy, it doesn't reverse quickly. Selling gold is a big deal — it can signal distress. So I think this trend has legs. Luna: For the average listener, does any of this matter? I mean, should I be buying gold because the People's Bank of China is? Lucas: No, I wouldn't use it as a buy signal. Central banks have different time horizons and different constraints than individual investors. They're not trying to time the market. But understanding why they're buying does tell you something about the macro environment: there's a widespread perception that the current monetary system is undergoing a structural shift. Luna: And that's worth paying attention to, even if you don't own a single ounce. Lucas: Exactly. Central banks don't make big portfolio moves on a whim. When hundreds of them collectively decide to buy a thousand tonnes of gold two years in a row, it's worth understanding the logic. And the logic is about trust — in the dollar, in sanctions regimes, in the stability of the global financial order. Luna: So gold isn't just a relic. It's a barometer for how central banks feel about the world. Lucas: It is. And right now, that barometer says: uncertain enough to pay for insurance.