GRIMALDI & PARTNERS: Why are central banks still stockpiling gold in their vaults?

By Silvano Grimaldi, CEO Grimaldi & Partners

Zurich – Is gold preferable to stocks in 2023? How far will the price of gold go? Silvano Grimaldi, CEO of the independent asset management company Grimaldi & Partners AG, gives you the answers to these questions.

Trend to increase gold
There is an increasing trend by central banks and investors, particularly Europeans, to buy gold due to inflation concerns and geopolitical risks. Central bank purchases in 2022 were the highest since 1967 and this trend is expected to continue in 2023.

Gold has outperformed digital assets and set some records in 2022. Central banks and other sovereign wealth funds have bought a significant amount of gold, with a net 1,136 tonnes in 2022, the most significant volume in 55 years. Demand from investors has also increased, particularly from Europeans, Germans and the Middle East. Global supply increased by just 2% and demand by 18% in 2022, the highest level since 2011. B. the high volatility on the financial markets and the resulting geopolitical tensions or the war that Russia has been waging in Ukraine since February 24, 2022.

Inflation Hedge
The current trend of investors turning to gold as a safe haven asset and inflation hedge in a global economic landscape characterized by rising interest rates, runaway inflation and the threat of recession. As an example of the trend towards de-dollarisation, which revolves around the important and changing relationship between commodities, gold and the dollar, Ghana's recent announcement that the country intends to buy oil with gold instead of the US dollar is cited.

However, rising interest rates are unfavorable for gold, making bond yields more attractive for diversifying investor portfolios, especially since gold doesn't pay dividends or coupons. Therefore, a slowdown in interest rate increases could be beneficial for gold. The article also highlights the US dollar's impact on the gold market, with a strong dollar making gold more expensive to buy for holders of other currencies.

Despite these challenges, gold's limited supply and apolitical nature make the precious metal a consensus choice for a multipolar world where trust in institutions and sovereign states is eroding. The author concludes that although there may be short-term macroeconomic and geopolitical volatility, the trend towards depolarization and rising demand for safe haven assets such as gold are likely to continue.

Conclusion: Can the current rally continue?
The current gold price rally could continue on the back of a weakening US dollar, a spike in US inflation leading to dovish US monetary policy and lower US Treasury yields. However, due to limited foreign exchange reserves in many countries, central banks may not be as active gold buyers in 2023 as they were in 2022. Despite this, some central banks have made delayed announcements of gold purchases, which could add uncertainty to price forecasts. Therefore, the gold market could be in for some surprises in 2023. Gold as an investment should therefore be seen as an addition to the portfolio even in these uncertain times. One should never forget the opportunity cost of gold as gold does not pay interest or dividends. At the moment, both interest rates are positive and the dividend yield remains attractive, making gold less attractive, except as a safe haven in stormy times for investors with weak nerves.