For the longest time, investors, corporations and countries have used gold as a store of value during times of economic upheaval. While other assets and traditional currencies such as the dollar are known to depreciate when the economy stagnates, gold mostly retains its value even as economic conditions deteriorate.
Storing assets and cash as gold bullion has historically allowed investors to weather economic downturns without losing the value of their investments and assets. With global economic conditions stagnating in recent years and experts predicting that there will likely be a recession in late 2023 or early 2024, it seems that emerging economies have begun shoring up their gold holdings.
The World Gold Council has reported that central banks around the world purchased 400 metric tons of gold bullion in the September quarter alone. These gold inflows are similar to the amount of gold that central banks usually buy over an entire year. Russia has bought more gold than any other territory over the past four years followed by Turkey, India, Poland, Kazakhstan, and China.
Central banks tend to keep the full extent of their gold-buying sprees under wraps because they are such big players that they can singlehandedly affect the market by revealing their hand. For instance, gold prices dropped exponentially in the 1990s and 2000s partly due to some European central banks selling their gold simultaneously and distorting the market.
Interestingly, nearly all of the countries that have ramped up their gold purchases are dealing with a variety of economic issues. Turkey, which purchased 95.5 tons of gold, saw its currency (lira) go down by 52% year over year through September. The Egyptian pound was down by 20%, and the North African country added 44.8 tons of gold, while India’s rupee slumped by 8.7% amid a purchase of 40.5 tons of gold.
Although stockpiling gold by a central government usually shows investors that the government is going to be a reliable and prudent borrower, debt-saddled governments such as Egypt and Iraq may not be able to boost their creditworthiness by adding up their gold holdings.
Even though gold has been a good store of value in the past, it is not a particularly solid investment as it offers zero interest and is now being outperformed by the returns lenders gain from government debt. On the other hand, gold is not tied to the whims of governments like centralized currencies are, meaning it is largely insulated from geopolitical factors such as the Western sanctions in Russia that wiped nearly $498 billion off of the Russian Central bank’s balance sheet.
It is likely that these nations are adding to their gold bullion holdings to shield themselves from the greenback’s influence amid an increasingly delicate and precarious geopolitical scene. Needless to say, these purchases by central banks around the world are providing a steady market for the gold extracted by miners such as Newmont Corporation (NYSE: NEM) (TSX: NGT).
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