Central banks are increasing their gold reserves.. Why?

Concerns about America's ongoing fiscal deficit and inflationary pressures are driving a shift towards gold (Shutterstock)

In a strategic move to diversify away from the dollar, central banks around the world are stepping up efforts to accumulate gold reserves.

The American Oil Price website said in a joint report with ZeroHedge that concerns about the continuing fiscal deficit in the United States and inflationary pressures are pushing towards this transformation, despite the stability of the dollar and the rise in real yields.

This trend, highlighted by large gold acquisitions in China, Germany and Turkey, highlights global efforts to protect reserve assets from potential declines in the value of the dollar and risks to the financial system.

According to Oil Price, the rise in gold prices, which have reached 50-year highs against most major currencies, is not attributable to traditional factors such as ETFs or seasonal buying.

Instead, large purchases by central banks influence the rise of the precious metal.

Federal Reserve Chairman Jerome Powell earlier confirmed the Fed's commitment to lowering interest rates this year.

However, other central banks are adopting a more cautious approach.

The recent rise in gold prices suggests that global central banks are actively hoarding the precious metal to mitigate the risks associated with the dollar's persistent fiscal deficit, which threatens to erode its real value and contribute to further inflation.

ETFs from major buyers hold nearly 2,500 tons of gold (Shutterstock)

While the dollar has remained stable and real yields have risen over the past three months, gold prices have continued to rise.

It is noteworthy that gold prices rose to unprecedented levels for the fourth session in a row yesterday, Friday, amid growing expectations about reducing interest rates next June.

Gold prices in spot transactions increased 9% to $2,179.16 per ounce at the close yesterday, Friday, while US gold futures contracts rose 1% to $2,186.2.

The precious metal has risen by more than 6% since the beginning of this month.

The most active central banks

Central banks in China, Germany and Turkey have been the most active in boosting their gold holdings over the past 6 months, indicating a concerted effort to diversify their reserves.

The Oil Price website notes that in recent years, ETFs have been major buyers, owning approximately 2,500 tons of gold.

However, these funds' holdings declined even as the dollar price of gold rose, indicating a shift in market dynamics.

Gold's recent rise to new record levels indicates that central banks, not ETFs, are likely to lead the rise in the next phase.

Central banks are increasingly attracted to gold as a hard asset that exists outside the financial system when owned directly.

 Diversify reserves

Moreover, the desire to diversify away from the dollar is the dominant motive.

The United States' persistently large fiscal deficits have made central banks around the world uneasy about holding excessive amounts of dollars.

These sentiments are reinforced by the overvaluation of the dollar on a purchasing power parity basis against major developed market currencies, according to ZeroHedge magazine.

With the continuing geopolitical tensions, embodied in the Russian-Ukrainian war, the Israeli war on Gaza and the Red Sea tensions, central banks are working to enhance their gold reserves as a means of protecting their assets.

Source: Oil Price + Agencies