Why Central Banks Will Buy More Gold in 2023

Why Do Central Banks Buy Gold? (Updated 2023)

Gold has always been highly regarded in the financial system across the globe. Gold is money however, it has a higher value than the currency itself. People or nations hold paper money or coins, knowing that they can exchange them for gold whenever they want. Gold was used as money until the dissolution of the Bretton Woods system at the end of World War II.

Central banks have always horded gold, relying on it when inflation rises and the value of currencies plummet. Central banks have been buying gold forever and they are still doing that now. In 2022 the demand for this precious metal rose by 18% resulting in more than 4,741 tons of gold. This is the largest amount of gold that was sold in one year since 2011.

Why is buying gold increasing?

More people buy gold bullion Brisbane for two main reasons. First, gold does well in times of crisis.  

Gold is also a source of long-term profits. There are no additional costs or risks associated with investing in gold. Central banks hold gold to manage risk that economic upheavals might cause.

For many years, the US dollar served as a reserve currency. To trade internationally, counties must exchange their currencies to dollars and then convert that currency to the one of the country they want to trade with. In 2022, the value of the dollar rose so sharply, central banks began to worry. Countries tried even harder to keep their currency or exchange rate in dollars.

Countries like Turkey increased their gold. In particular, Turkey added 542 tons of gold to stem the effects of high inflation and wanted more gold to increase confidence in foreign markets.

If you look closely at the number of countries that increased their gold stashes, you will notice that a lot of them are part of the BRICS (Brazil, Russia, India, China, South Africa) coalition who have desire for financial freedom from the dollar driven economy. For instance, China has been hoarding gold for years to reduce its dependence on the dollar. India has also been buying gold to support its struggling Rupee.

The impact of the gold trading system on the global economy and gold market

Buying gold in advance can trigger a couple of things to happen.

  • When precious metal dealers see the rising price of gold, there are more investors looking to buy gold bullion Brisbane. Investors who already own goldwill see the value of their investment increase.
  • Gold will play a big role in defusing money. Central banks will use gold to peg their currencies to the dollar and prevent excessive depreciation or appreciation that might negatively their own economies and currencies.

Finally, an increase in investors buying gold might drive the price of stocks and bonds and other investment assets. Savvy investors may decide to buy more gold if they believe it will have higher returns. There are people who believe that the gold standard should return to lessen the hegemony that the U.S dollar has had over the years but the possibility of this happening is low. However, this can happen if the currency falls so low it is deemed useless. It has happened before like in Venezuela where gold became an acceptable means of currency replacing the bolivar.

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