Central bank buying of gold reached its highest levels for almost half a century last year as Russia, Turkey and Kazakhstan boosted purchases to shift their reserves away from the US dollar.
Central banks bought a net $27bn worth of gold, driven by Russia, whose net purchases were the highest on record, according to the World Gold Council, an industry-backed body. Volumes came to 651.5 tonnes, an increase of 74 per cent on the previous year.
The buying reflects continued efforts by emerging market central banks to diversify their large holdings of dollar reserves in the face of rising global trade tensions. The share of central bank currency reserves held in the dollar fell close to a five-year low in the third quarter of 2018, according to the International Monetary Fund.
The purchases helped boost the price of gold in the second half of last year, following a 10 per cent fall in the first half of 2018. Gold prices hit their highest level in eight months on Tuesday at $1,314 a troy ounce.
“A lot of emerging market central banks have had significant dollar exposure; they need to manage that risk through having an allocation to gold,” said Alistair Hewitt, head of market intelligence at the World Gold Council.
Amount of gold bought by Russia last year
Central banks have been adding to their gold holdings since the financial crisis, and now hold about $1.4tn worth of the yellow metal, according to the Official Monetary and Financial Institutions Forum, a London-based think-tank.
The shift towards a multicurrency reserve system will “be accompanied by a period of heightened financial uncertainty, supporting central bank demand for gold,” according to an upcoming report from the OMFIF.
Russia bought 274.3 tonnes of gold last year, its biggest net purchase on record, funded by the sale of its holdings of US Treasuries, according to the WGC. Net sellers included the central banks of Australia, Germany, Sri Lanka, Indonesia and Ukraine, which sold a combined 15.6 tonnes.
Russia’s gold reserves, which at 2,066 tonnes are worth some $87bn, comprise just 18 per cent of its total reserves. Germany, by contrast, has 69 per cent and the US, 74 per cent.
The majority of buying by Russia’s central bank has been from domestic gold production, according to analysts, which allows it to bypass the dollar completely.
“You’ve got the entire structure from mining to refineries there,” said Philip Newman, director of Metals Focus, a consultancy. “It’s relatively straightforward.”
Last year some European central banks also entered the market, with Hungary increasing its gold reserves tenfold in October, to 31.5 tonnes, the highest level in nearly 30 years. Poland also bought 12 tonnes last October.
The year’s net purchases were the highest since America decided to move off the gold standard in 1971. Under that standard, the value of the US dollar was expressed in gold at a congressionally set price of $35 per ounce. Following President Nixon’s decision to sever the link, the dollar’s value was eventually decoupled from gold in 1976.