The gold market was caught by surprise when two of eastern Europe’s biggest economies, Poland and Hungary, made rare purchases in recent months. Why central banks buy gold is often a major topic of market speculation. Were Poland and Hungary signaling worries about economic conditions? Were they cutting exposure to the dollar? Or maybe hedging against potential European Union sanctions?
Why do central banks own gold?
Mainly to diversify their reserves. Gold — a finite asset as opposed to a fiat currency — can help stabilize economies amid times of market turmoil. Bullion has a time-honored appeal as a haven and hedge against inflation. And gold has a negative correlation with the dollar, which means its value often rises when there’s a dip in global demand for the U.S. currency.
Central bank holdings of gold have jumped in the past decade, driven mainly by Russia, China and Kazakhstan, among other countries. Central banks now hold more than 33,000 metric tons of the metal, about a fifth of all the gold ever mined.
