Why does the central bank hoard gold? Dollar weakens as Fed faces rate cuts

On January 7, data released by the State Administration of Foreign Exchange showed that as of the end of December 2023, my country’s gold reserves had reached 71.87 million ounces, an increase of 290,000 ounces from the previous month. This is the 14th consecutive month of increase in my country’s gold reserves.

It is worth noting that the global demand for gold purchases will continue to be strong in 2023, and central banks of various countries have obvious signs of actively increasing their gold reserves, and have plans to further increase their gold reserve holdings. my country's gold reserves have increased month by month since November 2022, with a total of 9.23 million ounces added during the period.

An Kai, global head of research at the World Gold Council, said that as a reserve asset, gold has the characteristics of safety, liquidity, low volatility and excellent returns, which can help holders hedge risks, effectively improve the performance of investment portfolios, and provide investors with Providing stable and higher returns is an important reason why central banks continue to purchase gold.

Affected by multiple factors such as gold purchases by central banks around the world and rising expectations of an interest rate cut by the Federal Reserve, gold prices have performed brilliantly. The price of gold futures on the New York Mercantile Exchange will increase by more than 13% throughout 2023.

"Historically, gold performed strongly in the later stages of the Federal Reserve raising interest rates, and the central bank will increase its reserve demand for gold." Postal Savings Bank researcher Lou Feipeng said that in recent years, the global economic recovery has faced uncertainty and geopolitical conflicts have increased. The hidden risks have highlighted the value of gold as a safe-haven asset, and the central bank has increased its demand for gold in its reserve assets. At the same time, the central bank's promotion of diversification of reserve assets to better spread risks will also help increase demand for gold.

Wu Dan, a researcher at the Bank of China Research Institute, believes that increasing gold holdings is of great significance to optimizing the structure of my country's reserve assets and coordinating the safety and profitability of foreign exchange reserve assets. The value of gold reserve assets is less affected by inflation, financial risks or geopolitics. It has the characteristics of stable value, strong liquidity and high rate of return. Therefore, increasing gold holdings is conducive to improving the central bank's reserve asset management capabilities and diversifying the risks of foreign exchange reserve assets. Maintain the security and scale stability of foreign exchange reserve assets.

Looking to the future, experts interviewed believe that the central bank’s “gold hoarding craze” may continue. The World Gold Council report shows that according to the results of the 2023 Global Central Bank Gold Reserve Survey, more than 70% of the surveyed central banks expect global gold reserves to increase in the next 12 months.

"The demand for gold purchases by global central banks and official institutions has doubled, which has brought important structural changes to the gold market." An Kai believes that factors such as geopolitical risks, sanctions risks, and the multipolarization of the global reserve currency system This has fueled a trend of central bank gold purchases that could continue for years or even decades and is expected to further support gold's performance. At the same time, gold has the dual properties of investment tools, luxury goods and jewelry making materials. Therefore, as an important part of foreign exchange reserves, the central bank will help promote the rise in demand for gold, whether for investment or consumption purposes.

Experts also believe that there is still a lot of room for improvement in the diversification of China's reserve assets, and in the current context of a more complex and severe external environment, it is still necessary to increase gold holdings from the perspective of diversified asset allocation.

"Currently, my country's gold accounts for only about 4% of official reserve assets, while the proportion of gold in the foreign exchange reserves of the United States, Germany, Italy, France and other countries is as high as 60% to 70%." Wu Than said that in the global economic growth momentum Insufficient, developed economies will start to cut interest rates and the global "de-dollarization" wave, it is expected that global central banks will continue to hoard gold in 2024, and the demand for various economies to diversify reserve assets and increase gold purchases will remain strong.

Lou Feipeng also believes that in terms of future development, the Federal Reserve is facing an interest rate cut that may lead to a weakening of the U.S. dollar. There are still many uncertain and unstable factors in the global economy. The proportion of gold in my country's central bank reserve assets is obviously low. These factors will push the central bank to continue to increase Demand for gold.

Industry insiders are generally optimistic about the gold price trend in 2024, which will further increase market demand for gold. "Gold has good investment value in 2024, and the price center still has upside potential." CITIC Securities Chief Economist Ming Ming said that the downward trend of U.S. dollar real interest rates is clear, and the Federal Reserve is expected to start cutting interest rates by the middle of this year at the latest. The de-inflation process in the United States is still relatively slow. In the current rapid de-inflation process, the rapid decline in energy prices has a very large contribution. Therefore, the risk of nominal inflation fluctuating again due to crude oil price fluctuations this year still exists.