Ok, so central banks may not be buying gold chains and jewellery by the truckload, but recent data shows that the yellow metal has lost none of its allure among those who are in charge of managing a country’s currency/foreign exchange reserves.
Despite gold prices plunging to a four-year low in 2014, gold remains a hedge against inflation and/or a fall in paper currency. That’s especially true in the case of Russia, which turned out to be the biggest buyer of gold among the world’s central banks in 2014. A recently published World Gold Council report said that Russia’s central bank snapped up 173 tonnes — equivalent to 36% of global central bank demand last year.
It’s not hard to understand why: a turbulent mix of ongoing conflict with Ukraine, a dramatic decline in oil prices, a weakening Russian ruble and surging inflation have led to investors stampeding for the exits and capital outflows.
In recent weeks, ratings agencies S&P and Moody’s cut Russia credit rating to ‘junk’ – providing yet another sign of the country’s economic prospects going from bad to worse.
Government officials have also warned that the economy is likely to shrink 3% in 2015. Given this backdrop, it’s no surprise the Russian central bank has resorted to placing its faith in the most traditional of assets sought after in times of crisis – gold.
Here’s a chart depicting central bank purchases throughout 2014:
Source: World Gold Council
In contrast, Ukraine was the only central bank to significantly decrease gold reserves, which fell 44% to 24 tonnes. (Lots of conspiracy theories abound about where all that gold, but there are no conclusive answers.)
Overall, central banks bought 477.2 tonnes of the shiny metal in 2014, 17% higher than what they purchased in 2013.
That makes 2014 the year posting the second highest level of central bank net purchases in 50 years (the highest was in 2012, when central banks added 544 tonnes to global gold reserves).
Clearly, volatility in the financial markets is making everyone nervous – and gold remains very much on the investment radar of central bankers around the world.