The shift away from the Federal Reserve Note as the dominant global reserve currency of choice has continued to happen in recent years. Notably, the fresh developments in the technology space have also increased the dollar’s stiff competition.
It has led to massive central bank acquisition of gold, with the trend expected to continue in 2021. Based on a recent report from the World Gold Council, 21% of the central banks in the world have significant plans to acquire gold in 2021.
Why Do Central Banks Keep Acquiring Gold?
Multiple reasons are pushing central banks around the world to buy and hold as much gold as they can afford. The precious metal’s reputation as a portfolio diversifier and its major role as a have asset are popular and discussed in many publications.
However, the yellow metal’s ability to boost risk-adjusted returns while also working as an integral form of collateral is a less-discussed topic that may also be quite important. A survey by the World Gold Council showed that no central bank has any near-term plans to sell its gold reserves in 2021, having dropped from a 4% reading in the past year.
“This year’s survey continues to highlight significant interest in gold amongst central banks, with the backdrop of the COVID-19 pandemic underscoring the importance of maintaining liquid, uncorrelated assets in a reserve portfolio.
“Inflation has also resurfaced as an investment consideration and may inform central bank asset allocation in the coming years. We believe that central banks will continue to be net buyers of gold, albeit at somewhat lower volumes than those of the previous decade.”
Gold delivered a strong performance during the Covid-19 epidemic which might be the biggest reason why many central banks are buying the precious metal in 2021. Here are some of the main reasons why the global monetary planners are accumulating significant amounts of gold:
- Gold has been proven to be a great diversifier. Since it is not correlated to bonds and stocks, it can add the much necessary portfolio diversification to a portfolio while also providing some additional credibility
- Gold is trusted and reliable. The precious metal has been a reliable store of wealth and a protector of value for centuries. This reputation will not change anytime soon based on the current global market conditions. Adding gold can lend some credibility to any central bank and its currency.
- Gold is a tested and proven inflation fighter. Currently, inflation appears to be on a steep surge and it has become more important than ever to own assets that may outperform as the prices surge. With the Federal Reserve and many other major central banks around the world holding rates at near or zero and printing money every month, the requirement for an inflationary hedge has become a pressing matter.
- Gold does not have any counterparty risk. The gold market is global with the metal carrying zero counterparty risk. It cannot default, go bankrupt, or even screw its owners up. Gold is recognized and valued throughout the world and is always an accepted means of payment.
- Gold can be used for interventions anytime. The precious metal is described as the ultimate currency. Thus, having gold as part of central bank reserves offers the central planners a significant tool to intervene in the markets for any reason they find necessary.
If gold is being acquired by the biggest and most powerful financial institutions in the world, individual investors can also join in the buying. However, they should always do thorough market research to ensure that they do not risk their investment while speculating the market prices.