Central banks continue to be positive on gold, with about the same number of central banks expected to buy gold compared with last year, the World Gold Council (WGC) said on June 8.

In its ‘2021 Central Bank Gold Reserves (CBGR)’ survey, the council noted that 21% of central banks intended to increase their gold reserves over the next 12 months.

Central banks are also increasingly valuing gold’s performance during periods of crisis – with this attribute topping their rationale for holding gold.

These results come amid ongoing uncertainty stemming from the Covid-19 pandemic, a situation which has added significant complexity to central bank reserve management.

Several of the survey’s findings point to this growing complexity, with 84% of respondents reporting that uncertainty over the post-Covid economic recovery is relevant for their reserve management decisions.

The same proportion of respondents say that negative rates – the most relevant factor in last year’s survey – continue to inform their investment decisions, alongside the continuation of expansive monetary and fiscal policies, which, combined with the prospect of rising inflation, will likely be at the forefront of central bankers’ concerns for the foreseeable future, the council said.

This year’s survey respondents, however, continue to show strong interest in growing their own gold reserves, though respondents are said to have less conviction about the overall trend in central bank holdings.

This reflects, the council suspects, recognition that some central banks sold gold last year and that one prominent buyer, the Bank of Russia, announced a halt to its regular buying.

Overall, 52% of respondents believe that global central bank gold holdings will grow in the coming year, down from 75% last year. At the same time, respondents also demonstrate greater conviction on their own direction for gold, as only 11% do not know their plans for gold this year, compared with 20% last year.

Central banks have also been venturing into non-traditional asset classes in recent years, driven by both low yields and evolving policy objectives, the WGC noted.

This year’s CBGR survey included a question on non-traditional asset classes for the first time. Respondents said sustainable bonds were the most popular asset class, with nearly half of respondents saying they would increase their exposure to this area.

This corresponds to the continuing importance attached to environmental, social and governance (ESG) as central banks, especially those from advanced economies, deepen their focus on this area, the WGC noted.

However, despite growing hype among some investors, no central banks report any plans to invest in cryptocurrencies, and this year’s survey continues to highlight significant interest in gold among 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 central banks will continue to be net buyers of gold, albeit at somewhat lower volumes than those of the previous decade. The results of the 2021 CBGR survey provide continuing support for this view,” the council commented.

INTERNATIONAL RESERVES

After a dip in the growth of central banks’ international reserves last year, the change in total reserve levels has rebounded, with 68% of central banks reporting higher reserve levels than five years ago, up from 53% last year.

The factors that have led to the growth in reserves have shifted since last year’s survey, “as a buffer against balance of payments crises” remains the most popular reason, with 37% of respondents citing it.

However, the WGC pointed out that factors related to cross-border flows “as a consequence of exchange rate policy” had witnessed significant drops in their relevance compared with previous surveys.

This, the council said, may indicate ongoing worries about the possibility of financial instability, while cross-border activity has understandably slowed owing to the pandemic.

Among the factors that influence reserve management decisions, “negative interest rates” continue to be the most relevant, though this top spot is shared with “uncertainty over the economic recovery following Covid-19”, which was added as an option this year.

The WGC said this result underscores the additional complexity that the pandemic has introduced, and that “shifts in global economic power” and “ESG issues” followed in importance.

However, the council said there was a notable gap between advanced economy central banks and their emerging market and developing economy (EMDE) counterparts on attitudes towards ESG, with 65% of advanced economy respondents citing ESG as relevant, more than double the 31% of EMDE respondents who thought so.

Respondents continue to foresee long-term structural changes in the international monetary system, continuing a trend indicated in last year’s survey.

Views toward the dollar trended downward, with half of respondents saying the greenback would fall below its current level.

Central banks, meanwhile, continued to think that the renminbi’s proportion would increase, with 88% saying that it would grow beyond current levels, although the majority said this growth would be modest.

Central banks’ views on gold over the next five years witnessed a downward shift, with 38% of respondents saying gold’s proportion of international reserves would be greater than its current position, down from 69% last year.

According to the survey, the majority of respondents believed gold would occupy a range of between 10% and 16% of international reserves, from its current position of 16%.

This result corresponded to a later question on the short-term outlook for central bank gold buying and may reflect less conviction amongst individual respondents about the direction of the overall community, the council added.

MOTIVATIONS AND INTENTIONS

Four-fifths of central banks surveyed hold gold as part of their international reserves, which was broadly unchanged from previous surveys. However, the rationale for holding gold has seen an “interesting evolution”, the WGC reported.

“Performance during times of crisis” is now the top reason to hold gold, the council said, with 79% of respondents marking it as highly or somewhat relevant.

This factor has climbed to the top spot after ranking fourth in 2019 and second in 2020, a progression that the WGC said “may reflect the increasing importance that central banks attach to crisis mitigation and a potential nod to gold’s strong performance during the pandemic”.

“Historical position” is now the second most relevant reason to hold gold, followed by a tie between “long-term store of value” and “effective portfolio diversifier” in third place.

There continues to be a significant divergence between advanced and EMDE central banks on their rationale for holding gold, and the council said this divide was starkly illustrated in the responses to “performance during times of crisis”, with 91% of EMDE respondents marking it as highly or somewhat relevant compared with 53% of advanced economy central banks.

Virtually all other investment-related characteristics showed a similarly strong divergence as well, including “long-term store of value”, “no default risk” and “lack of political risk”.

EMDE central banks generally face greater challenges in maintaining orderly capital flows and currency stability. These results indicate that EMDE central banks tend to view gold as an important component of their overall reserve management strategy, especially at a time when there is a greater need for risk-mitigating assets, the council explained.

Over the next 12 months, 52% of respondents say global central bank gold holdings will increase, a drop from 75% in 2020, and a further 32% of respondents say global central bank gold holdings will remain unchanged, while 5% say they will decrease.

The WGC noted that these results may reflect the slowdown in central bank gold buying in 2020 when net purchases declined to 326 t, from 668 t in 2019, and therefore less overall certainty in the direction of the central bank community.

They may also reflect ongoing worries about the state of global markets and a heightened need to deploy reserves, if necessary, the council said, noting that this was in contrast to the previous point, where there is increased certainty among central banks on their own plans for gold. Twenty-one per cent of respondents say they will add gold to their reserves in the next 12 months, up slightly from last year.

No central bank plans to decrease its gold holdings, down from 4% last year, and a further 68% have no plans to change their gold holdings while 11% do not know their plans.

The proportion of those who do not know their plans has halved from 20% in 2020.

Overall, the WGC said central banks appear to have slightly more conviction on their own plans for gold, while simultaneously having less clarity on the global central bank community’s direction.

An additional question was added in this year’s survey on diversification into non-traditional asset classes, where nearly half of respondents planned to increase their allocation to sustainable bonds in the next 12 months.

The foray into sustainable bonds is dominated by advanced economy central banks, with 80% planning to increase their exposure compared with 30% among EMDE respondents.

Investment-grade corporate bonds and equities followed as the next most popular categories, though the council said that it was "notable that no central banks plan to invest in cryptocurrencies despite interest in this area from other investors”.

MANAGING GOLD RESERVES

Among survey respondents, 72% manage gold separately from other reserve assets, a figure which has fallen from previous years. The proportion who manage gold as part of an investment tranche or a liquidity tranche showed very little movement compared with last year.

The proportion of those buying gold on the global over-the-counter (OTC) market has decreased to 43% from 60% last year, and another 43% of respondents say their gold is a historical legacy asset, a new option added to this year’s survey to reflect the fact that some central banks may have acquired their gold in the distant past.

Interestingly, the WGC pointed out that 4% of respondents say they buy gold through exchange-traded funds (ETFs), and the same proportion say they use financial derivatives.

Good Delivery bars continue to be the mainstay with 70% buying gold in that form.

Good Delivery refers to the unhindered transfer of ownership of a security from a seller to a buyer, with all necessary requirements having been met.

Kilo bars and doré were much less popular, although the council said both categories saw upticks versus last year. Just under one-quarter of respondents have considered upgrading gold holdings that do not conform to Good Delivery standard, with the bulk of those coming from EMDE respondents.

The Bank of England continues to be the most popular storage location, with 63% of respondents vaulting there. This marks a significant increase from last year and may indicate growing importance attached to keeping gold in liquid trading centres.

Domestic storage has also grown to 39% of respondents, also higher than previous years.

However, the changes in custody arrangements at the individual level reflect less movement, with 2% of respondents having increased domestic gold storage compared with 5% in 2020.

Further, none of the respondents intend to increase domestic storage in the coming 12 months compared with 7% in 2020.

The proportion of respondents who actively manage their gold reserves remains roughly unchanged from last year at 35%, and gold deposits are the most widely used method for gold management, followed by gold swaps.

CONCLUSION

Overall, the WGC said this year’s CBGR survey indicates continuing central bank interest in gold, and that this potentially drives this interest in a growing recognition of gold’s financial characteristics, particularly during periods of crisis.

At the same time, ongoing concerns about global market volatility and the path of the post-pandemic economic recovery continue to inform central banks’ views of gold.

These same factors may also be clouding respondents’ opinions on the overall direction of central bank gold holdings despite having more certainty on their own plans for gold, the council noted.

Looking ahead, the WGC said central banks would need to balance financial and geopolitical uncertainty with a potentially strong pick-up in global growth.

“We believe central banks will continue to be net buyers of gold, although total volumes may not be as large as in the previous decade.

“The slightly stronger conviction towards gold among respondents in this year’s survey may suggest that central banks have a clearer picture of their plans for the coming year, and is supportive of continued gold purchases from the official sector,” the council stated.