CICC: Do Not Overestimate the Driving Force of Global Central Bank Gold Purchases

Abstract Gold prices have been on a strong upward trend since 2025, with a common view being that global central banks are buying gold in large quantities for hedging purposes. However, after the outbreak of the Middle East conflict, gold price volatility has significantly increased. In reality, there are many factors influencing gold prices, but global de-financialization has been pushing up the prices of real assets in recent years, and the rise in gold prices is a manifestation of this trend. Under the new macro paradigm, traditional gold pricing frameworks are also facing challenges. The correlation between central bank gold purchases and gold prices has also strengthened. However, data shows that in recent years, it has mainly been central banks in emerging markets and developing countries that have increased their gold holdings, especially non-floating exchange rate economies. Developed countries' central banks, on the other hand, do not need to intervene in exchange rates and their foreign exchange reserves are relatively stable, thus showing less willingness to increase gold holdings, with a few even showing a slight reduction. Based on the relationship between global central bank gold purchases and gold prices, and with different assumptions, we can simply extrapolate gold prices in corresponding scenarios. Preliminary results suggest that a correction after a rapid rise is reasonable. However, it should be noted that real-world situations are far more complex than assumptions, and theoretical deductions are merely a reference from one perspective. Body De-financialization is Driving Up the Prices of Real Assets, Including Gold Several factors contribute to the rise in gold prices, with a major background being what we termed global de-financialization a few years ago. To understand de-financialization, we must first understand the origins of financialization. Widespread financialization in the West originated in the early 1980s with the resurgence of liberal thought, particularly neo-classical liberalism, in the West, especially in the United States. Neoclassical domestic liberalization was characterized by an emphasis on monetary policy, a downplaying of fiscal policy, and relaxed financial regulation. External liberalization included trade liberalization, global supply chain arrangements, capital account openness, and free floating exchange rates, strengthening the dollar's position. Another important manifestation of economic liberalization in the UK was privatization. A key aspect in the US was the relaxation of financial regulation, leading to rapid financialization. Financialization refers to the increasing role of finance in resource allocation and the significant weakening of fiscal resource allocation. However, the strong return of neo-classical liberalism brought a series of problems, which we analyzed in detail in our report "Not a Choice, But an Imperative --- The US Policy from a Political Economy Perspective." For example, financialization led to the rapid development of finance in the US, the outward migration of manufacturing, increased wealth disparity, and ultimately culminated in the subprime mortgage crisis. The 2008 financial crisis challenged mainstream economic thinking. Financial resource allocation may not be efficient, and politicians and academics began to reflect on the inherent maladies of the financial system – the self-reinforcing relationship between credit and asset prices, its pro-cyclical nature leading to potential systemic risk accumulation, and the inability of floating exchange rates to absorb the shock of capital flows. Geopolitical shifts and the pandemic have further accelerated de-financialization. Geopolitical conflicts have led to economic and financial sanctions, significantly reducing the fungibility of financial assets. De-financialization on the liability side means an increased role for fiscal policy, strengthened financial regulation, and a relatively decreased importance of monetary policy. Monetary and fiscal policies are coordinated, with blurred boundaries. Enhanced financial regulation leads financial institutions to allocate more to safe assets. The inflation center shifts upward, as private sector deleveraging increases the risk of asset bubbles, while government deleveraging supports inflation. De-financialization on the asset side means that the concept of safe assets has changed. The safety of traditional safe assets has declined, such as US Treasury bonds and quasi-safe assets in the private sector of developed countries (bank deposits, high-grade asset-backed securities). The importance of real assets has increased, corresponding to a decrease in the importance of financial assets. In 2022, the Russian ruble briefly appreciated against the trend, mainly due to Russia's possession of oil and gas. We believe that the support of commodities such as natural gas, oil, and iron ore for currency value will increase. Of course, real assets include not only commodities, land, and non-ferrous metals, but also technology. Gold has three attributes: investment, consumption, and industrial. The investment attribute of gold significantly strengthened in 2025. Its investment attribute stems from gold's physical scarcity, and its financial attributes of inflation hedging, non-sovereign status, and safe-haven properties. The consumption attribute is because gold is a raw material for jewelry manufacturing, while its industrial attribute is due to gold's excellent conductivity and corrosion resistance, primarily used in high-end technology industries. However, gold's industrial attribute accounts for the smallest portion of its value, hovering around 7% in recent years, while its investment attribute reached 44% in 2025, an increase of 16 percentage points from 2024. Figure 1: Breakdown of Gold Demand Source: World Gold Council, CICC Research Department Figure 2: Proportion of Gold's Three Demand Attributes Source: World Gold Council, CICC Research Department The traditional gold pricing framework is also facing challenges, meaning the explanatory power of traditional gold pricing logic on gold prices has decreased. For example, historically, gold prices had a relatively significant negative correlation with US real interest rates. Real interest rates represent the return on the real economy and are the opportunity cost of holding gold. Since gold is typically used to hedge against inflation, real interest rates, after excluding inflation, better capture its opportunity cost. However, this relationship has been broken since 2022, with gold prices and US real interest rates rising simultaneously. Another example: gold is priced in US dollars, so when the dollar depreciates, the dollar price of gold rises. Similarly, this relationship has weakened since 2022, with the dollar index and gold rising simultaneously. Figure 3: Divergence Between Gold Price and US Real Interest Rates Note: Real interest rate = nominal interest rate - inflation expectations Source: iFinD, CICC Research Department Figure 4: Divergence Between Gold Price and Dollar Index Source: iFinD, CICC Research Department Let's look at the changes in the composition of global central bank foreign exchange reserves. Around 1900, gold accounted for about 90% of global official reserves. After the collapse of the Bretton Woods system in 1971, its proportion fell to about 40%. During the stagflation of the 1980s, gold's share rose to over 60%, but by 2007, it was only about 10%. However, in recent years, it has shown a gradual upward trend. In 2025, gold accounted for 26% of global central bank foreign exchange reserves, surpassing US Treasury bonds, a new phenomenon in the last 30 years. According to the International Monetary Fund (IMF) database, as of Q2 2025, global official reserves amounted to $7.4 trillion. According to US Treasury data, as of Q2 2025, foreign official holdings of US dollar assets were $6.9 trillion, roughly in line with IMF data. Of this, equities accounted for $2.2 trillion, long-term US Treasuries for $4.3 trillion, and short-term US Treasuries for $0.4 trillion [1]. Within long-term US Treasuries, US Treasury bonds were $3.5 trillion, agency bonds $0.6 trillion, and corporate bonds $0.2 trillion [2]. Figure 5: Global Foreign Exchange Reserve Distribution Source: Gainesville coins, CICC Research Department Figure 6: Gold's Share in Central Bank Reserves Surpasses US Treasury Bonds Source: IMF, FRED, CICC Research Department Primarily Central Banks in Emerging and Developing Countries are Increasing Gold Holdings So, is the increase in gold holdings by central banks a global phenomenon? Data shows that since the 1960s, the physical gold reserves held by central banks in developed countries have shown a downward trend, but have remained largely unchanged in the past 20 years (during which time central banks in emerging markets and developing countries have been increasing their gold holdings). If we look at the proportion of gold's total value in official reserves, this proportion has risen in recent years for both developed and developing economies. One reason for this is the rapid increase in gold prices, which does not solely reflect an increase in the volume of holdings. Figure 7: Official Gold Holdings Source: IMF, CICC Research Department Figure 8: Proportion of Gold Held by Central Banks in Reserve Assets Source: IMF, CICC Research Department Specifically, among major gold-holding countries, from Q4 2021 to Q4 2025, China, Poland, Turkey, and India increased their gold holdings significantly, while Germany and Kazakhstan reduced their holdings. The US, Italy, France, and others have seen little change in their gold holdings. The Russian central bank continuously purchased gold from 2006, reaching a peak in 2022, and sold a small amount in 2025. The peak in 2022 was 2,332.8 tons, an cumulative increase of 1,945.9 tons compared to 2005, averaging an annual increase of 114.5 tons. As of November 2025, the Russian central bank's total gold holdings were 2,326.5 tons. Poland's central bank increased its gold holdings mainly due to geopolitical risk considerations. Figure 9: Gold Holdings of Major Central Banks Source: IMF, World Gold Council, CICC Research Department From the perspective of exchange rate regimes, between the end of 2021 and the end of 2025, central banks in floating exchange rate economies did not increase their gold holdings significantly, while those in non-floating exchange rate economies increased them relatively more. In fact, foreign exchange reserves of developed economies are generally stable because their exchange rate regimes are primarily floating, eliminating the need to maintain large foreign exchange reserves. This also means that developed economies naturally have limited room to significantly increase their gold holdings. In the 1960s, the US, to maintain the Bretton Woods system, allowed other countries to exchange dollars for gold, and its gold reserves fell from 20,000 tons in 1950 to about 8,000 tons in 1971. From 1961 to 1968, the US and seven European central banks jointly established the London Gold Pool, intervening in the London gold market to maintain the price of gold at $35 per troy ounce. In the 1990s, Eurozone central banks restructured, reducing their gold allocation in foreign exchange. In 1999, the European Central Bank established the Central Bank Gold Agreements, which set annual limits on gold sales by member states to prevent disorderly selling. Data shows that the gold holdings of the central banks of the UK, Switzerland, Germany, France, and the US have remained relatively stable over the past few decades. Figure 10: Central Banks in Non-Floating Exchange Rate Economies Increase Gold Holdings More Than Those in Floating Exchange Rate Economies Source: IMF, World Gold Council, CICC Research Department Figure 11: Foreign Exchange Reserves of Developed Countries' Central Banks are Relatively Stable Source: iFinD, IMF, CICC Research Department Figure 12: Gold Holdings of Developed Countries' Central Banks are Relatively Stable Source: IMF, CICC Research Department Data also shows that some central banks have reduced their gold holdings recently. For example, in 2025, the central banks of Singapore, Germany, Russia, Jordan, and Mexico net sold gold. Among these, Singapore and Germany have been selling gold for two consecutive years. Some central banks have also slowed down their gold purchases, including those in Turkey, China, the Czech Republic, Uzbekistan, and Kyrgyzstan. Figure 13: Changes in Central Bank Gold Holdings Source: World Gold Council, CICC Research Department Why Do Central Banks Hold Gold? To answer this question, let's first look at the principles of central bank foreign exchange reserve management. According to a survey by the World Bank, most central banks consider safety and liquidity as primary principles, with only one-third considering appreciation important. In other words, foreign exchange reserve management prioritizes safety and liquidity, with asset returns being a secondary concern. Safety here refers to capital preservation. According to BIS definitions, safety in foreign exchange management includes low volatility, controllable risk, and a low probability of price decline [3]. Surveys by the World Gold Council also reflect this characteristic, with central banks citing inflation hedging, performance during crises, and portfolio diversification as the main reasons for holding gold – all manifestations of safety. Geopolitical risk is also a determining factor for central banks holding gold, but it is not a primary one. Figure 14: Key Factors Influencing Foreign Exchange Reserve Investment Note: Data in the chart represents the response rate among surveyed central banks. Source: Alimukhamedov, Kamol. Gold Investing Handbook for Asset Managers. World Bank, 2024., CICC Research Department Figure 15: World Gold Council: Holding Gold Due to Geopolitical Factors is Not Common Note: Data comes from the "2025 Central Bank Gold Reserve Survey" conducted by the World Gold Council from February 25, 2025, to May 20, 2025. Source: World Gold Council, CICC Research Department Historical data shows that gold prices are quite volatile. Estimates based on daily data from 1971 to 2025 indicate a gold price volatility of 19%, comparable to the Nasdaq 100, lower than Brent crude oil's 26%, but higher than the MSCI Emerging Markets Index's 17% and the MSCI World Index's 15%. In reality, gold seems to be primarily used to hedge against extreme risks. For instance, after the "9/11" attacks in the US, gold's monthly return in September 2001 reached about 7%, while during the subprime mortgage crisis, the European debt crisis, Brexit, the COVID-19 pandemic, and the Russia-Ukraine conflict, gold's returns were generally between 0% and 2.2% [4]. Gold prices surged at the end of 2025 and early 2026, but after the outbreak of the Middle East conflict, gold prices actually showed increased volatility and even declined. Figure 16: Gold's High Volatility, Not a Safe Asset Note: Gold volatility calculated using daily prices from 1971-2025; other assets calculated from the earliest available time. Source: World Gold Council, CICC Research Department Figure 17: Gold and US Stock/Bond Returns During Extraordinary Periods Source: Alimukhamedov, Kamol. Gold Investing Handbook for Asset Managers. World Bank, 2024., CICC Research Department Relatively speaking, gold has high liquidity, comparable to US stocks, mainly because the participants in the gold market are large funds with a small proportion of retail investors. For example, based on data from January 1, 2025, to December 31, 2025, the estimated average daily trading volume exceeded $350 billion, second only to Nasdaq stocks. Over-the-counter (OTC) transactions account for half of gold trading, with the London Bullion Market Association (LBMA) being the primary OTC market, accounting for 90%. The main exchange-traded markets for gold are the New York Mercantile Exchange (COMEX) and the Shanghai Futures Exchange, accounting for 65% and 29% of exchange-traded gold, respectively. The gold ETF market is relatively small, accounting for only 2% of overall gold trading volume. In terms of long-term returns, gold is not low. Using data from 1971-2025, we found that the annualized returns for gold and crude oil were around 9%, while the Nasdaq 100 had an annualized return of 15.4%, and the S&P 500 was 12.6%. Figure 18: Average Daily Trading Volume Note: Average daily trading volume estimated based on data from January 1, 2025, to December 31, 2025. Source: World Gold Council, SIFMA, CICC Research Department Figure 19: Gold Trading Distribution (2025) Source: World Gold Council, CICC Research Department Data also shows that gold has a weak correlation with other asset prices. For example, gold prices have virtually no correlation with US bonds and stocks, meaning that adding gold to an asset portfolio can effectively reduce portfolio volatility. The 2025 World Reserve Management Survey report indicates that the primary purpose of global central banks increasing gold holdings is diversification. From an asset management perspective, a 2020 study by the Bank for International Settlements (BIS) showed that an average allocation of 22% of total foreign exchange reserves to gold can minimize investment risk. Figure 20: Gold's Return is Not Low Note: Annualized returns for gold and crude oil use data from 1971-2025; other assets use data from 1990-2025. Source: World Gold Council, CICC Research Department Figure 21: Weak Correlation Between Gold and Other Financial Assets Note: Correlation of monthly returns from 1971-2025. Source: World Gold Council, CICC Research Department Figure 22: Asset Management Perspective: Allocating 22% to Gold Can Minimize Risk Note: Using 10 years of data, simulating 5000 times, resulting in a frequency distribution chart. Source: Zulaica, Omar. What share for gold? On the interaction of gold and foreign exchange reserve returns. No. 906. Bank for International Settlements, 2020., CICC Research Department Scenario Analysis: Extrapolating Gold Prices from Global Central Bank Gold Purchases What forward-looking indicators can be used to predict gold prices? One indicator is the proportion of long positions in futures contracts. From 2016 to 2023, if the proportion of non-commercial long positions in gold futures contracts reached a periodic bottom, gold prices might strengthen subsequently. Since mid-2025, this indicator has been in continuous decline for some time. Does this signify that gold prices will strengthen again in the short term? In fact, as mentioned earlier, global central banks' motivation for increasing gold holdings has been relatively stable in recent quarters, with a slowdown in purchase speed or a slight reduction. From Q4 2021 to Q4 2025, the correlation between the proportion of global central bank gold allocation and gold prices has been very significant. From Q4 2009 to Q4 2021, there was also a certain positive correlation between central bank gold purchases and gold prices, but it was less pronounced than in the period from Q4 2021 to Q4 2025. Based on the correlation between the proportion of global central bank gold allocation and gold prices from Q4 2021 to Q4 2025, we have made a simple estimation as a reference. Beyond central banks, non-governmental investors holding gold are likely more focused on value appreciation (consumption attribute is more for decorative purposes), exhibiting more pro-cyclical behavior. Taking gold ETFs as an example, due to their investment convenience, they are an important tool for institutional and individual investors to invest in gold. We find that gold ETF holdings are usually positively correlated with gold prices, reflecting a "buy high, sell low" characteristic. Figure 23: Decline in Proportion of Gold Futures Long Positions Source: iFinD, CICC Research Department Figure 24: Recent Global Central Bank Gold Purchase Pace is Relatively Stable Note: In 2020-2021, the pace of central bank gold purchases slowed due to liquidity and fiscal pressures. Source: World Gold Council, CICC Research Department Figure 25: Increasing Positive Correlation Between Global Central Bank Gold Purchases and Gold Prices Source: IMF, iFinD, World Gold Council, CICC Research Department Figure 26: Scenario Assumptions for Extrapolating Gold Prices from Global Central Bank Gold Purchases Note: As of Q4 2025, Russia's central bank gold allocation is close to 40%; Turkey's central bank gold allocation is close to 55%, the highest among non-floating exchange rate countries. The scenario of increasing to 22% mainly assumes increases in gold holdings by countries such as China, India, Singapore, Iraq, Libya, Brazil, and Mexico. In the scenario of increasing to 30%, in addition to the countries in the 22% scenario, Poland, South Africa, and Qatar are also assumed to increase gold holdings. In the scenario of increasing to 40%, in addition to the countries in the 22% and 30% scenarios, Egypt, Jordan, and Pakistan are also assumed to increase gold holdings. In the scenario of increasing to 50%, in addition to the countries in the 22%, 30%, and 40% scenarios, Russia and Belarus are assumed to increase gold holdings. Source: IMF, iFinD, World Gold Council, CICC Research Department Figure 27: Pro-cyclical Behavior of Gold ETF Investors Source: World Gold Council, CICC Research Department Another reference indicator is the ratio of total gold value to the total currency value of major economies. The ratio of gold's value to broad money is at its third highest level since the 1960s, second only to 1979 and 1980. If the ratio of gold's value to broad money reaches the high point of 1980, we have also provided a preliminary estimated corresponding gold price in the chart for reference. However, as mentioned earlier, there are many factors influencing gold prices, and traditional gold price estimation frameworks are facing challenges. The reality is far more complex than our assumptions. Figure 28: From the Ratio of Gold Value to Currency Source: World Gold Council, iFinD, CICC Research Department Risk Warning and Disclaimer Markets involve risks, and investment requires caution. This article does not constitute personal investment advice, nor does it consider the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinion, view, or conclusion in this article is appropriate for their specific circumstances. Investment based on this is at the user's own risk.