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Risk of sanctions is pushing central banks to add more gold to their reserves, says IMF's Working Paper
(***** News) With 2022 being the year when central banks bought the most gold since 1967, more research is being done on what's driving this trend. And the latest Working Paper from the IMF points to fear of sanctions.
After looking into 144 countries and examining their gold-buying tendencies, the Working Paper titled 'Gold as International Reserves: A Barbarous Relic No More?' said that fear of multilateral sanctions plays an increasing role, especially when it comes to emerging markets.
"We find that reserve managers in emerging markets increase the share of reserves held in gold in response to sanctions risk. Many of the largest year-on-year increases in individual central banks' gold holdings occur at times when those central banks are or have reason to think that they may be subject to financial sanctions," said the paper.
It’s important to note that the IMF Working Papers outline the research in progress by the authors and do not represent the views of the IMF. The paper, published Friday, was co-authored by Serkan Arslanalp, Barry Eichengreen, and Chima Simpson-Bell.
Central bank data from 2022 clearly shows a new trend of stockpiling gold, especially in emerging market economies. The latest data from the World Gold Council (WGC) showed that central banks purchased 1,136 tonnes of gold last year — the most in 55 years. This also marked the second-highest level on record going back to 1950 and was a more than 150% increase from last year. And buying was primarily driven by emerging market banks, including Turkey and China, according to the WGC's report.
The IMF's Working Paper showed that the volume and value of gold reserves also rose with the imposition of sanctions from the U.S., U.K., Euro Area, and Japan (to which the paper refers to as the Big Four). The enforcement of financial sanctions from all these currencies at once makes emerging economies seek more gold in their reserves.
"There is some evidence that multilateral sanctions imposed by these and other countries have a larger impact than unilateral sanctions on the share of reserves held in gold, since the latter leave scope for shifting reserves into the currencies of other non-sanctioning countries," the paper stated.
The decision of G7 countries to freeze Russia's foreign-exchange reserves in response to its invasion of Ukraine has potentially pushed other emerging economies to consider holding more of their reserves in a form that is better insulated from sanctions, such as gold.
"Tabulat[ing] the 10 largest annual increases in the gold share of reserves since 1999. In fully half of these cases, the countries in question were subject to sanctions in the same year or the two immediately preceding years," the paper said.
Based on the paper's research, the presence of financial sanctions from one of the "Big Four" currency issuers raised the gold share by around two percentage points, the authors of the report added.
"For example, for the full sample, the results indicate that the imposition of Big Four financial sanctions is associated with an increase in gold volumes of 4.2 million fine troy ounces (about 130 metric tons)," they wrote.
Other reasons for buying gold
The IMF's Working Paper identified other key reasons why countries have been increasing their gold reserves since the Global Financial Crisis.
One trigger is an increased need to hedge against economic and geopolitical risks. "Gold shares in advanced countries and emerging markets are increasing with a measure of economic uncertainty, and those in advanced economies increase in addition with a measure of geopolitical risk," the paper's authors noted.
Another reason is a response to relative costs and returns. "When the expected return is high while that on financial assets, such as U.S. Treasury securities, is low," the paper said.
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