Why is this so important? Because this is how central bankers think about Gold, and by understanding how they view the asset class, it is possible to contextualise their decisions. We have recently seen that central bank purchases of gold are the strongest in the past 25 years. This is an important nod towards the nature of risk-free status and towards a fraying of trust between sovereigns. According to the World Gold Council, central banks’ gold purchases have reached 673 tonnes in 2022 alone – the highest level since 1967. Some of the largest buyers of the metal were the central banks of India, Qatar and Uzbekistan, alongside some undisclosed buyers who evidently felt that reporting these purchases would be market sensitive.
So, why are central banks across the world buying so much Gold? There are two primary reasons. Firstly, market and geopolitical volatility have pushed many central banks to increase stockpiles of Gold, famously seen as a safe-haven asset during periods of economic turmoil. Secondly, it is often seen as a good long-term hedge against inflation, and with high levels of inflation persisting, many central banks are storing their wealth in Gold rather than cash. Gold has historically been seen as the ultimate form of ‘risk-free’ money – measuring the performance of fiat currencies.
Although the dollar has gathered strength in 2022, this has mostly been driven by central bank guidance and policy. The US will have to reverse their hawkish policy action and guidance at some point due to the ongoing record issuance and lack of buyers and liquidity in the treasury market. Currently, the Fed is adamant that they will continue their regime of interest rate hikes until inflation falls to an acceptable level. However, it is only a matter of time until they are forced to reverse their current policy. When this happens, dollar real interest rates will weaken, creating a supportive environment for monetary metals in US Dollar terms, matching strength we have already seen in Gold expressed in other currencies.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.