Central Banks’ Gold-Buying Spree Raises Investor Interest: Should You Follow Their Lead?

Central banks worldwide have been buying gold at unprecedented levels since 2020. Though originally driven by economic uncertainty and inflation during the pandemic, their gold purchases have continued even as inflation has cooled and monetary policies shift. Here’s why central banks are loading up on gold, what drives its value, and whether investors should consider gold in their portfolios.

A Brief History of Gold as Currency

Central banks’ affinity for gold is not new. For decades, many global currencies were directly tied to the gold standard, where each unit of currency was backed by a corresponding amount of gold. The U.S. moved away from this standard in 1933, and other countries followed. However, the enduring value of gold has persisted even with the adoption of fiat currency systems, where money’s value isn’t backed by physical assets.

Gold has remained resilient, reflecting historical trends where economies experienced surges in inflation after moving away from gold-backed currencies. As central banks print more money, the value of fiat currency typically declines, while gold’s intrinsic value increases relative to those currencies, making it an attractive option for central banks and investors alike.

How Much Gold Are Central Banks Buying?

Central banks worldwide bought a record 1,082 metric tons of gold in 2022, a trend that continued in 2023 with 1,037 metric tons. In 2024, the buying momentum remains strong, with central banks purchasing nearly 300 metric tons in Q1 alone and another 183 metric tons in Q2, both record-setting quarters for those periods. By Q3, an additional 186 metric tons were acquired, signaling continued demand, though slightly lower than Q3 2023 levels.

According to the World Gold Council, demand for physical gold assets has more than doubled year-over-year, showcasing gold’s appeal amidst global economic uncertainty.

Why Are Central Banks Buying Gold?

Central banks’ motivations to hold gold are multi-faceted, including these major drivers:

  • Inflation Protection: As governments printed massive amounts of money to support pandemic recovery, inflation surged to record highs, reducing the purchasing power of currencies. Gold, however, remains a stable store of value, making it an ideal hedge against inflation.
  • Falling Interest Rates: Recent Federal Reserve rate cuts have increased the availability of money, which can lead to inflation. Interest rate cuts typically make borrowing cheaper, which stimulates spending and economic activity, but also leads to higher inflation. Gold’s value tends to rise in inflationary environments, making it a strategic reserve asset.
  • Global Uncertainty: Ongoing geopolitical conflicts, such as those involving Ukraine and Russia, along with unrest in other regions, have led to economic unpredictability. Gold is viewed as a safe-haven asset, a trend reflected in central banks’ increased purchasing during times of instability.

Should You Consider Buying Gold Like Central Banks?

For individual investors, gold can serve as a reliable store of value and a potential hedge against inflation and currency volatility. In 2024, gold has outperformed the S&P 500 year-to-date, bolstered by factors such as Federal Reserve rate cuts and economic uncertainty. As inflation remains close to historical averages, gold offers investors an asset that maintains intrinsic value even in fluctuating markets.

Related: Goldman Sachs Predicts Gold Prices Will Surge 8% by 2025 Amid Soaring Demand

Gold has maintained value for thousands of years and is not only a medium of exchange but also used in jewelry, dentistry, electronics, and automotive industries. As the money supply grows, gold’s rarity and demand support its long-term value. However, investors should assess their financial goals, risk tolerance, and portfolio strategy before investing in gold, as it may not suit every investment objective.