Central banks buying more gold than previously thought

Central banks buying more gold than previously thought

Thailand seeks to shield reserves from market turbulence

NEW YORK - Central banks have loaded up on more gold than previously thought this year, offering crucial support to prices that have faced pressure from global monetary tightening.

Countries expanded bullion reserves by 337 tonnes in the three months through September, the World Gold Council said in a report on Tuesday.

That follows an increase of 175 tonnes in the second quarter, which was bigger than the council’s previous estimate of 103 tonnes.

Central bank purchases for the first nine months of the year now total 800 tonnes, driven mainly by China, Poland and Singapore, as well as unreported buying. The pace has exceeded the amount for the same period of last year, which ended with record demand.

The buying spree has provided a key counterweight to investor sales over the past year, underpinning prices that last week topped US$2,000 an ounce for the first time since May. The robustness of the market has left gold increasingly disconnected from inflation-adjusted Treasury yields, which are normally a key driver of non-interest bearing bullion.

Bullion surged this month following Hamas’s attack on Israel, which inflamed tensions in a region that’s crucial to global energy supplies and boosted demand for a haven. The advance has pushed gold prices closer to a record of about $2,075 set in 2020.  

- Thailand -

The Bank of Thailand (BoT) views gold as a relative safe haven in an era of high inflation and growing geopolitical risks, according to a central bank official.

The BoT seeks to safeguard its $210 billion of foreign reserves from the market turbulence and has increased its gold holdings over the past three years as it diversified its investments, deputy governor Alisara Mahasandana said in an interview last week. 

She declined to give details of official gold purchases, but central bank data showed the value of bullion in its reserves has doubled since 2019. Gold has stood out as one of the biggest winners since Hamas attacked Israel on Oct 7, surging about 9% as demand for haven assets increased. 

For Thailand, diversifying its reserves has become even more imperative after its stockpiles - mostly held in foreign currencies, US Treasurys and valued in dollars - tumbled about $47 billion since reaching a record $258 billion in December 2020. A 20% slump in the baht during the period and central bank efforts to cushion the currency’s decline have also eroded the reserves.

Bank of Thailand’s gold reserves were valued at $15.6 billion as of Oct 20, up from $7.5 billion at the end of 2019, according to BoT data on its website. 

“Asset allocation has become more challenging,” Alisara, who oversees the country’s reserves and a member of its rate-setting panel, said in an interview on Oct 27. “We need to create a resilient portfolio against all shocks and changes around us. So, diversification is the key issue.” 

BoT has focused more on asset-diversification to minimize the impact from post-pandemic higher-for-longer interest rates in major economies, soaring public debt, a Chinese slowdown and a raft of geopolitical tensions, Alisara said. 

Bonds of some of the countries previously perceived to be safe bets face uncertain outlook, adding to BoT’s challenges, she said. 

“Gold prices move in different direction to bond prices and prices of other assets that we can invest,” Alisara said. “It’s a hedging tool during high inflation and political uncertainty as well as geopolitical events. It’s good for risk diversification.”

- Stress tests -

Gold is often considered as a safe haven in times of low real interest and cheap dollars and  has retained its appeal even with a rally in the fiat currency and the highest interest rates since the financial crisis. The precious metal, which is up 9% this year, is trading near its highest level since May. 

The BoT has tweaked its reserve management strategy over time to include assets from emerging markets, which have high risk-adjusted returns, according to Alisara. Still, the central bank follows its principles to preserve reserve values, liquidity and maximize risk-adjusted returns, she said.

The BoT had done “stress tests” and scenario analysis of its portfolio in line with global changes.  The Thai central bank has also started to incorporate environment, social and corporate governance principles into its long-term reserve management policies, Alisara said.

The bank will assess whether the return from green assets is acceptable or not, she said.

Thailand’s foreign reserves rank the 11th largest in the world, a result of gradual building up following the Asian financial crisis in 1997–1998. The stockpile is 2.3 times the nation’s short-term foreign debt, well above above the global benchmark to cover the liability. As of Oct 20, the reserves stood at $210.7 billion. 

Do you like the content of this article?