Of the best-performing markets this year to date, gold must be at the top of the list. Many believe central bank reserve holdings of gold are a key push factor driving the gold price up. However, data suggest this is not the case.
The accompanying chart shows the gold price with the change in central bank reserve holdings month-over-month (MoM). The claim that the increased holdings caused the higher price does not seem obvious. Since the beginning of the 2010s, world central bank reserve holdings have been increasing steadily while the gold price surged stepwise in the years 2019/2020 and 2023/2024.
In fact, the opposite is being observed: as gold prices uptrended from the mid-2000s, central bank holdings turned from underweight to overweighting. Nevertheless, if this conjecture is true, then why didn’t the central bank further increase its holdings as the gold prices kept surging over the past few years? Of course, this might be due to the constraints of actual available gold mined.
Among the mined gold, nearly half is already in the form of jewellery, while the rest is split between bars, coins, ETFs, and other private and central bank reserve holdings. There is not much gold for central banks to buy from the market, and the deal is especially difficult when sellers in the market are scattered while central banks as buyers are concentrated.
Some conjecture that China’s increase in holdings pushed up the price. According to the reported statistics, China tends to do so when the gold price is near a low point. Recently, there have been reports that China is selling instead of buying. A reasonable conjecture would be that China is acting as a speculator, buying low and selling high rather than betting on the collapse of the U.S. Dollar or backing up her Renminbi.
After all, central bank holdings account for only 17 percent of total gold demand, which should not be a key driver of the gold price. Nowadays, none of the fiat currencies are backed by gold. U.S. dollar holdings (in Treasury bonds) are far more important in maintaining the exchange rate, as a huge amount of gold cannot be readily liquidated at a reasonable price within a short period.
Apart from paying no yield (or even negative if counting storage costs), the disadvantage of gold holdings is price volatility. Although gold has been labeled as a “safe haven,” it can result in a sharp loss within hours. Decades of experience suggest its bull period is about half of its bear, meaning that long-term gold holdings would make you have a much longer unhappy time than happy time, roughly in the ratio of 2:1. This is because gold is not productive as stock where the underlying firms keep generating profits. Gold just rides on its scarcity.
Scarcity means inelastic supply, so gold prices are prone to demand shock and are, by construction, volatile. Central bank reserve holdings still follow human nature: Given that the amount needed to defend a currency’s value is not that much, fund managers trading for central banks speculate on gold as all other speculators do.
