Banks on a Gold Buying Spree

on Mar 24, 2016
Updated: Oct 10, 2019

Gold began 2016 on a high note that seems to be continuing with the passing months. The precious metal has been a favorite among those who seek to protect their portfolios from considerable risk. The turbulent market has led to such individuals investing in the yellow metal at an increasingly enthusiastic rate.

It is not just individuals or investment firms who have begun to buy gold. Banks have always been big investors in the precious metal. There has been, however, a significant increase in the purchasing rate of gold.

Central Banks and Gold

For the last eight years, central banks have been one of the main net buyers for the precious metal. The three main countries involved in the purchasing race are China, Russia, India, and Kazakhstan. It is estimated that about 14 per cent of the yearly gold demand stems from the central banks of a variety of countries. In 2015 alone the World Gold Council apprised that around 590 metric tons of the precious metal were purchased by major nations. This is the second highest quantity recorded in recent years. China and India were responsible for about 45 per cent of the demand. This was in part due to the increase in consumer demand from the two countries.

The purchasing of gold by central banks began to increase in the latter half of 2015. In the final quarter, the buying rate was 25 per cent greater than the previous year. This upsurge in buying the precious metal occurred despite the decrease in gold production. The reduction in mining the yellow metal has resulted in a four per cent decrease in manufacturing.

Reasons for Surge

Much like individual investors and investment firms, banks too are using gold as an investment haven. They are endeavoring to balance the volatility of the market and currency by investing in the precious metal. In an attempt to diversify themselves from the U.S. dollar, banks are turning to the commodity that they feel is more stable. China, too, is attempting to counteract the devaluation of the yuan in Beijing by investing in gold. The falling prices of oil also play a role in central banks’ renewed interest in the precious metal. They are seeking a different commodity to finance.

Gold has a tendency to perform at a less than optimal level when the economy is strong. When currencies begin to devalue due to inflation, the precious metal is typically the safety net. Deutsche Bank, too, is encouraging the continued purchase of gold. They are citing the uncertainty of the American and Chinese market. The banking giant suggests the yellow metal as a safeguard against the current volatility depicted in the global financial system.

It is uncertain whether gold will continue its ascent in value and importance. There are a great number of institutions and governments that are placing a great deal of deference to the precious metal. It is yet to be determined whether this sudden confidence in gold is the cause for its almost meteoric rise. The other reason perhaps maybe that gold is the saving grace of the current market.

Image Credit: theeventchronicle