Gold and central banks - Do what we do not what we say

 

I thought at one time that central banks believed that gold was a "barbarous relic". Those times are long gone. The latest survey on central bank behavior and gold shows that 3/4ths will increase their gold portion of total reserves. It is higher simply because the price of gold is higher; yet, we are seeing more central banks increasing their gold exposure. Where is it coming from? Survey results suggest that dollar exposure is expected to decline. Reduce dollar exposure and hold more gold. 

43% of central banks expect to increase their gold exposure in the next 12 months. This is up from 8% in 2019. Gold, the hard asset, is back with central banks. No, this comes even as inflation has fallen, so central banks may be arriving late to the table, although central bank gold holdings have been on the rise for years. 

The explosive increase in gold prices is simply. There is a shortage of this "safe asset" relative to supply. There have been pockets of lower demand, but central banks are price-insensitive 800-lb gorillas in the gold marketplace. This is more than an inflation hedge, but for many EM central banks, a sanction hedge. 

It is hard to see a substantial price reversal in gold when central banks are key buyers. Gold is not at attractive prices for accumulation but central banks are telling the market you should hold this diversifier.