Central banks’ behaviour with respect to gold has fundamentally shifted over the past few years. This reflects a combination of slowing sales from European central banks and large purchases from emerging market countries in Latin America, the Middle East and Asia. Since 2010, central banks have been net buyers of gold, and their demand has expanded rapidly, growing from less than two per cent of total world demand in 2010 to 14 per cent in 2014.
This change in behaviour is a clear acknowledgement of the benefits that gold can bring to a reserve portfolio. Some banks have bought gold to diversify their portfolios, especially from US$-denominated assets, with which gold has a strong negative correlation. Others have bought gold as a hedge against tail risks or because of its inflation-hedging characteristics (gold has a long history of maintaining its purchasing power).
Gold plays a prominent role in reserve asset management, as it is one of the few assets that is universally permitted by the investment guidelines of the world’s central banks. This is in part due to the gold market being deep and liquid, which is a key characteristic required by reserve asset managers.