Central banks take gold back home after freezing Russian assets

GET FREE CENTRAL BANK UPDATES

we will send you one myFT Daily Digest Latest Email Rounding Central bank News every morning.

A growing number of countries are bringing their physical gold reserves back home to avoid Russian-style restrictions on their foreign assets, while increasing purchases of the precious metal as a hedge against high levels of inflation.

Central banks made record purchases of gold globally in 2022 and the first quarter of this year as they seek a safe haven from high inflation and volatile bond prices, according to a survey of sovereign investors by asset manager Invesco. China and Turkey together account for about a fifth of these purchases.

Alarmed by the decision by the US and others to seize Russian assets, central banks opted to buy physical gold rather than through derivatives or exchange-traded funds that track the metal’s price.

And he also preferred to hold it in his country as global tensions escalated. The Invesco survey found that 68 percent of central banks keep some part of their gold reserves domestically, up from 50 percent in 2020. The survey showed that figure is expected to rise to 74 per cent in five years.

“Until this year, central banks were willing to buy or sell gold through ETFs and gold swaps,” said Rod Ringrow, head of official institutions at Invesco.

“This year it has been a lot of physical gold and other central banks have a desire to hold gold in the country rather than overseas. , , This is part of the Bank of Russia’s response to freezing reserves,” he said.

Soon after Moscow launched a full-scale invasion of Ukraine, the European Union, the US and other G7 countries announced they would impose sanctions on Russia’s central bank, preventing it from accessing nearly $300 billion in reserves held abroad . The EU is now considering the legal implications of diverting interest from these holdings to Ukraine.

According to a survey of 57 central banks and 85 sovereign wealth funds managing nearly $21 trillion in assets, many sovereign investors were “worried” by the precedent set by Russian asset seizures, with 96 percent saying that further investment in gold was motivated. . Its status as a safe haven.

“We raised exposure eight to 10 years ago and kept it in London, used it to drive swaps and raise yields,” a central banker from a western country told Invesco. “But we have now transferred our gold reserves back to our home country for safekeeping – its role is now to be a safe-haven asset”.

Global gold demand is set to reach an 11-year high of 4,741 tonnes in 2022, up from 3,678 tonnes in 2020, driven by central bank buying and rising interest from retail investors. World Gold Council Research, But when there was demand for physical gold, gold ETFs faced a combined outflow of about 300 tonnes in 2021 and 2022.

Other countries that have made significant gold purchases include Singapore, India and central banks in the Middle East.

Record central bank purchases of gold in 2022 contributed to a powerful rally in bullion prices, although the prospect of longer-term US interest rate hikes has pushed prices down in recent weeks to $1,923 per troy ounce. Rate increases reduce the appeal of a non-yielding asset compared to other investments.

Net buying of gold by central banks is expected to moderate this year after Turkey became a big seller. The central bank has had to supply gold to meet demand from domestic consumers as they buy the bullion to protect their savings from the lira which is trading at historic lows ahead of elections in May.

In a sign of moves to bring back gold, holdings at the Bank of England, one of the main storage centers for official financial institutions globally, fell 12 percent from their 2021 peak in early June to 164 million troy ounces.

The attractiveness of holding gold in large liquid centers such as London is also reduced by the fact that hedging by gold miners peaked at the turn of the millennium and has declined since then. This has limited the ability for central banks to earn income by swapping bullion stored abroad.