Why are the central banks buying so much gold unless they still fear inflation?

Wednesday, June 10, 2015
By Paul Martin

By Peter Cooper
Wednesday, 10 June 2015

Why are global central banks buying so much gold unless they still fear inflation? The World Gold Council estimates that 120 tonnes of gold were added to global central bank reserves in the first quarter of this year and that’s a whole lot more than they used to buy.

In fact even since 2010 the central banks have increased their share of global gold demand from just two per cent to 14 per cent last year. It’s one reason why gold prices have held up recently despite a shift from retail investors to speculation in the final stages of the US and Chinese stock market bubbles.

Inflation hedge

For central banks gold is the classic hedge against monetary instability and against inflation, that is to say unwanted devaluation that puts up the price of goods in the shops. Gold will hold its value while paper money devalues and the nominal price of gold goes up and up.

Emerging markets, and we have to class China as an emerging this case albeit the world’s second largest economy, are playing catch up with the developed world in terms of gold reserves. They only hold around 10 per cent of foreign exchange reserves in gold by comparison to 70 per cent or more for countries like the US and Germany.

Monetary experts say around 15 per cent might be enough to maximize the benefits of gold holdings, and even the relatively new European Central Bank has 25 per cent of its reserves in Maynard Keynes’ ‘barbarous relic’.

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