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The spot price of gold prices has recently come off of an all-time high reached in May, but new data from the World Gold Council’s (WGC) 2024 Central Bank Gold Reserves Survey shows that many central banks plan to continue buying gold and increasing its share of their reserves throughout the next half decade. The opinions of the 70 institutions included in the survey are likely reflective of the current market sentiment toward gold, but may also provide investors hints about officials’ feelings toward the trajectory of global monetary policy and economic stability over the next several years.
Per WGC data, the past two years have been historic in terms of gold buying at central banks. In 2023, these institutions added 1,037 tonnes of gold—the second highest annual purchase in history, trailing the 1,082 tonne buying spree in 2022. That largely reflects the sentiment among both Advanced and Emerging Market and Developing Economy (EMDE) central banks, which listed gold’s status as a store of value and inflation hedge as the most relevant factor in their decision to hold gold at 83% and 90%, respectively. Ironically, it was the actions of central banks themselves – particularly the US Federal Reserve’s – which played one of the most consequential roles in creating the inflation that surged between 2021-2022 and has remained quite sticky in most parts of the world throughout 2023-2024. MRP has long posited that inflation is a monetary phenomenon, and this allowed us to accurately project the coming of inflation rates in the “mid to high single digits” as early as January 2021 when the annual change in the Consumer Price Index (CPI) was running at roughly 1.4% and Americans were assured by the relevant authorities that any coming spike in consumer prices would be short-lived and “transitory”. As we all know now, this was not the case.
WGC began asking central banks how they expect their gold reserves to change in the next year back in 2019. Since then, the proportion projecting an increase has surged from just 8% to a series high of 29% in the most recent survey. Moreover, 81% expect overall global holdings of gold among central bank institutions to increase, suggesting that even those who do not plan on purchasing more gold recognize a trend among their peers to move toward larger gold allocations. Only 13% of central bank respondents expect that the proportion of global reserves denominated in gold will decrease over the next five years, compared to the 70% that see this figure increasing.
While it may seem counterintuitive that gold buying seems to be spiking while gauges of inflation are actually moderating in most areas around the globe, gold tends to be most attractive in anticipation of strong inflation in absence of restrictive monetary policy. For example, when the YoY increase in the US’s consumer price index (CPI) was peaking near 9.0% in June 2022, spot gold was barely holding onto the $1,800/oz threshold. Today, with the same inflation gauge showing an increase of just 3.3% throughout the 12 months to May, gold is trading roughly 29% higher at $2,320/oz and almost the entirety of the gain has occurred during a period of broad disinflation. To bring down inflation, it was necessary for the Fed and other central banks to increase their policy rates, which dragged up the yields of debt issued by the US Treasury. Those higher rates dented interest in gold, as it was increasingly possible to mitigate the impact of inflation (or beat it) by owning bonds or bills that carried yields guaranteed by the US or other sovereign authorities.
Though central banks hold large swathes of sovereign debt, especially US Treasuries, default risk is a growing concern among Advanced and EMDE institutions alike. More than two-thirds of Advanced and almost three quarters of EMDE central banks, respectively, attribute their holdings of gold to its lack of default risk. In August 2023, MRP detailed Fitch Ratings’ rationale for a downgrade of the US’s sovereign credit rating from a pristine AAA to AA+. Of the big three ratings agencies, only Moody’s still ranks the US as a AAA issuer, but their outlook on the US’s rating was lowered to “negative” last November.
In its press release explaining their US downgrade, Fitch wrote that the general government (GG) debt-to-GDP ratio is projected to reach 118.4% by 2025. This debt ratio is over two-and-a-half times higher than the AAA median of 39.3% of GDP and even the AA median of 44.7% of GDP. Throughout most of the last decade, the US could service its debt and keep federal deficits at manageable levels due to low interest rates throughout most of that period, but a rapid expansion of these deficits is increasingly diminishing the ability of the US’s tax revenues to handle the load of fiscal excess that remains ongoing.
In our most recent macro Viewpoint report, we noted that while the Fed has taken on a restrictive monetary policy over the past two years, government expenditures have shown no sign of similar moderation. Fiscal spending and deficit financing has continued with seemingly no acknowledgement of higher rates of interest being tacked on, which has now incurred an annual expense of more than $1.0 trillion – surpassing the federal government’s spending on defense. A graphic illustrated by Bank of America Global Research in April projected that the US’s annual interest payments could cross the $1.2 trillion threshold by the end of the year, even with 150bps of Fed rate cuts – equivalent to six cuts at the usual 25bps pace. With no cuts, the payments could be worth a much steeper $1.6 trillion.
With some central bank authorities already cutting their policy rates, and many more preparing to follow, the world is likely perceiving a brighter shine from gold yet again. More importantly, some additional attraction toward gold may be inspired by perceptions that central banks are losing their grip on inflation. The Fed has been adamant about bringing inflation back to its 2.0% target, but the most recent surveys of consumer sentiment the University of Michigan and The Federal Reserve Bank of New York each show that Americans are increasingly skeptical that Fed policy will be able to tame inflation, instead exhibiting a belief that it will float closer to 3.0% over the next five years. The Fed could indeed increase rates down the line instead of cutting to further pressure price growth, but this would likely put even more stress on the fiscal health of the country and potentially initiate a recession by weighing heavily on economic growth.
This prospect seems to be something that officials are thinking about around the globe. Tied for first place among advanced economy central banks’ rationale behind holding gold was the metal’s “performance during times of crisis”. Less than two thirds of this cohort cited that in the 2023 version of WGC’s survey, but a much larger 83% agreed with that sentiment this time around. Gold’s remoteness from “concerns about systematic financial risks” is also becoming more appealing among advanced economies, now a relevant factor for a third of these countries’ central bank gold allocations, compared to just 18% in the prior year. Investors can gain exposure to gold via the SPDR Gold Shares (GLD).
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