In 2018 central banks purchased the highest amount of the precious metal in nearly 50 years. Why?
Technical article
Publication date:
26 March 2019
Last updated:
25 February 2025
Author(s):
Technical Connection
During 2018, the world’s central banks bought over 650 tons of gold, according to the World Gold Council. It was the second highest amount on record. Russia, Turkey, Kazakhstan and Hungary led this trend as they sold US Dollar reserves in preference for gold. One can argue about why they did this, but it is noticeable that these countries are more autocratic and follow a foreign policy that is more adversarial with western interests. This probably makes sense for these countries to reduce their reliance on US Dollar reserves and hold gold, something which is not dependent on the goodwill of the US financial system.
There does not seem to be an influx of private investors rushing to hold gold in their portfolios. Flows into gold ETPs seem to be fairly muted, although there was a bit of an uptick at the end of 2018 as the equity market hit an air pocket.
Between 1999 and 2011 the price of gold went from around US$250/oz. to over US$1800/oz. Some of the key drivers taking the price to US$1800 was the extraordinary growth of China, which released a lot of demand for a long-term store of value as domestic Chinese savings rates were so poor. This was assisted, at the time, by the end of the sale of gold by central banks, such as, like the Bank of England, and by gold producers buying gold derivatives. Gold suffered a large drop in 2012 and in 2013, and since then the price of gold has settled into the US$1050 to US$1350 range.
The price of gold seems to be quite sensitive to the international price of the US Dollar. When the US Dollar is strong, gold tends to be weak and vice versa. This is a relatively weak relationship, but if it holds then gold could get stronger, should the US Dollar weaken.
People buy gold in their investment portfolios because they hope it will act as a store of value, a diversifier and an inflation hedge. Peter Sleep, Senior Investment Manager at Seven Investment Management LLP (7IM), is unconvinced that gold is a great store of value. By far the easiest way to buy gold for investment purposes is to buy a gold ETC. 7IM own a small amount of the Invesco Physical Gold ETC which costs 0.24%.
We view an investment as something that produces an income in the long term. So assets such as property, bonds and equities fit that bill. Gold does not produce an income. In fact you have to pay to own it: it is an anti-benchmark. John Maynard Keynes referred to it as a barbarous relic and we do not disagree.
To illustrate this, in 2009 Terry Herbert found an Anglo Saxon gold hoard in Staffordshire, buried in around 650AD. It got a lot of news coverage at the time and is now displayed in the Birmingham Museum and Art Gallery. It contained many weapons but also 5kg of gold and was valued at about £3m recently. If our Anglo Saxon warlord’s heirs had returned and picked up their gold, they could have perhaps bought a nice house and car, but it is hardly the lifestyle of a modern day warlord. If the warlord had invested the money instead in Kingdom of Mercia 2% bonds, and these had been reinvested wisely over the years, then his heirs would have many hundreds of billions to spend – much more becoming for the descendants of a warlord.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.
