Lear Capital Reviews Central Bank Gold Buying: Its 2023 Impact on Precious Metal’s Value and a 2024 Outlook

Kevin DeMeritt, founder and chairman of Los Angeles-based precious metals firm Lear Capital, called central banks’ gold purchasing habits in 2022 “a huge jump” from the institutions’ previous activity — and says the demand for the asset may escalate in the coming year. 

“We have not seen this kind of buying from central banks for 50 years,” Kevin DeMeritt says. “That trend is going to continue to get more intense.”

Gold’s Global Allure

As the entities charged with managing economic stability within their country, central banks work to control economic fluctuations through monetary policy maneuvers. In a number of advanced economies, for instance, banks set targets for inflation, according to the International Monetary Fund. They often alter the supply of money through efforts such as buying or selling securities in the open market, which can influence short- and long-term interest rates and economic activity.

Central banks tend to purchase gold for numerous reasons — including to offset other assets’ volatility. Because gold, according to the CME Group, has been known to retain value as currencies and bond prices decline, a number of banks likely consider it to be a “safe haven” asset, which — unlike some other kinds — doesn’t require a specific issuer or government to trade.

Central banks have been buying up notable amounts of gold for the past approximately 14 years. Between 2008 and 2018, gold came to comprise roughly 10% of all central bank foreign exchange assets, according to the Official Monetary and Financial Institutions Forum.

In recent years, the banks’ interest in the precious metal hasn’t waned. Central bank gold demand skyrocketed 152% in 2022, compared to 2021’s level; last year, the banks’ gold purchasing reached 1,136 tons, the highest central bank gold buying activity in 73 years, according to the World Gold Council.

A summer central banks survey found their interest in gold over the past year stemmed in part from its performance during times of crisis and its standing as a long-term store of value.

In 2022, the CME Group notes Russia’s invasion of Ukraine, as well as financial market and economic uncertainty, helped encourage central banks to make their most robust gold purchases in more than 70 years.

Russia is one of several countries that’s shown a preference for gold over U.S. Treasury securities in recent years. Its securities-related investment holdings dropped by 84% between March and April 2018 alone, while its gold reserves have reportedly ticked upward, rising from 1,112.5 metric tons in October 2014 to 2,298.5 metric tons in January 2022. 

The Bank of Russia indicated its holdings had grown by 1 million troy ounces as of March 2023, since Russia invaded Ukraine; this, according to CME, helped position the nation to weather the sanctions Western countries placed on it after the invasion.

China, too — once one of the largest foreign holders of U.S. Treasury securities — has shed holdings in recent years in favor of gold. In 2022, China decreased its U.S.-based debt to less than $1 trillion for the first time in more than a decade. After seven months of increases, the country’s gold reserves had risen by 144 tons as of May 2023.

Central banks, according to Lear Capital, “know that throughout history, whoever holds the most gold has the most power.”

“Russia has completely eliminated all of their reserves of U.S. Treasurys, and what did they replace most of  it with? Gold,” Kevin DeMeritt says. “They’ve doubled the amount of gold they have held in reserve at their central bank.”

What Central Banks’ Interest in Gold Could Mean for Investors

Central bank-related demand for gold has been considerable this year; in the first quarter of 2023, the World Gold Council said demand had more than doubled from the prior business quarter. 

Gold’s value has also experienced increases. Prices for the precious metal reached a 52-week high of $2,082.72 on May 4 and were up 8.63% from the beginning of the year as of the morning of Nov. 21.

Because banks may hold gold they’ve purchased for a decade or more, their recent buying spree could further constrain the available supply of the precious metal, according to Kevin DeMeritt.

“That metal is gone [from the market],” the Lear Capital founder says. “And you’re not talking about small amounts.” 

Any economic upsets — such as high interest rates — have the potential to elevate the interest in gold from both central banks and other parties in the coming year.

“When investors are worried about the economy, usually you get more people turning to gold, which can drive up its price,” Kevin DeMeritt says. “We’re starting to see that more and more. If a recession takes hold [and] we start to see more financial instabilities happen around the country, and probably around the world, the demand from central banks could intensify, along with the demand from institutional and individual investors.”

Banks aren’t the only parties that can tap into precious metals’ potential benefits. The taxes individual investors pay on gold assets they’re holding in a self-directed individual retirement account will be deferred until they retire; gains obtained from selling gold items that are part of a precious metals-backed IRA won’t be taxed — at your marginal tax rate — until you begin taking distributions from the account.

To find out more about what’s involved in establishing and funding a self-directed IRA, visit Lear Capital’s website or call 800-576-9355.

“If you [have] a 401(k) or an IRA, and you’d like to take a portion and move it over to a self-directed gold-backed IRA, you can do that,” Kevin DeMeritt says. “It’s a pretty easy process. One of our representatives will get you the paperwork to transfer whatever portion you would like over to a physical precious metals IRA — and you can purchase, sell or liquidate those precious metals at any time.”

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