2022 was a milestone year for the gold market, with gold purchases reaching an unprecedented level. Central banks around the world, driven by rising inflation and international sanctions, began to heavily invest in gold reserves. Last year saw record gold buying from central banks with 1136MT purchased in total; of this figure, the second half of 2022 alone accounted for 800Mt*. This is a huge deviation from what has previously been seen as the average gold buying between 400-600MT. The increase in gold reserves is indicative of changing financial realities and will certainly drive gold prices up as we move into 2023.
Central Bank Buying Reveals Gold Preference Over Other Reserve Assets
When constructing a diversified portfolio, gold is often held as a central bank reserve asset due to its unique qualities and characteristics. An important consideration when selecting gold is that liquidity must exist not only during purchase but also should the asset need to be liquidated.
Liquidity provides gold investors with options to shift funds within different assets and reduces losses in an unfavourable market. This liquidity plus gold’s durability, recognition, and ease of transport make gold a valuable addition to any investor’s portfolio.
The concept of liquidity has been discussed and debated for many years, with gold consistently emerging as a prime consideration. Although there are several factors that differentiate gold from other asset classes, three in particular solidify gold's prominent role: correlation of price with need to sell, number of asset holders in the marketplace, and the increased value when others within the portfolio decline. Gold is able to provide these features due to its widespread appeal and acceptance – hugely beneficial when an investor requires quick access to liquid funds. In summary, gold's liquidity advantages make it a prime candidate for serious investor consideration.
The recent central bank purchases would imply that those institutions feel that gold increasingly meets many of their requirements, and that in the liquidity tranches of their portfolios, they can rely on 100% of the gold.
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