The threat of sanctions is forcing central banks to add more gold to their reserves, the International Monetary Fund’s work report said.

(Kitco News) Considering that 2022 is the year that central banks made the most purchases of gold since 1967, more research is being done on the factors that caused this trend. And the latest report of the International Monetary Fund refers to the fear of sanctions.

After surveying 144 countries and examining their propensity to buy gold, a working paper titled “Gold as an International Reserve: No More Brutal Effect?” He said the fear of multilateral sanctions plays a growing role, especially when it comes to emerging markets.

We find that reserve managers in emerging markets are increasing their holdings of gold in response to sanctions risk. “There is reason to think that they may be subject to financial sanctions.”

It is important to note that IMF working papers describe ongoing research by the authors and do not represent the views of the IMF. The article, published Friday, was authored by Sarkan Arslanalp, Barry Eichengren and Cheema Simpson-Bell.

Central bank data from 2022 clearly shows a new trend of gold hoarding, especially in emerging market economies. The latest data from the World Gold Council (WGC) shows that central banks bought 1,136 tons of gold last year, the most in 55 years. This was also the second highest level on record in 1950 and was up more than 150 percent from the previous year. According to the WGC report, the purchases were mainly made by banks in emerging markets, including Turkey and China.

The IMF working paper found that the volume and value of gold reserves increased with the imposition of sanctions by the United States, the United Kingdom, the Eurozone, and Japan (referred to in this article as the Big Four). The imposition of financial sanctions by all these currencies at the same time makes emerging economies look for more gold in their reserves.

There is evidence that multilateral sanctions imposed by these and other countries have a greater impact on the share of gold reserves than unilateral sanctions, as the latter creates the basis for the transfer of reserves to the currencies of other non-sanctioning countries. The paper stated.

The G7’s decision to freeze Russian foreign exchange reserves in response to Russia’s invasion of Ukraine has potentially forced other emerging economies to hold more of their reserves in a form that is better immune to sanctions, such as gold.

“He’s on the table[ing] This is the 10th annual increase in the share of gold reserves since 1999. In half of these cases, the countries in question were sanctioned in the same year or two years before.

The authors of this report add that based on the research of this article, the presence of financial sanctions on one of the “big four” currency issuers has increased the share of gold by about two percent.

“For example, for the full sample, the results show that the imposition of Big Four financial sanctions is associated with an increase of 4.2 million troy ounces (about 130 tons) in gold volume,” they wrote.

Other reasons to buy gold

The IMF working paper identified other key reasons for the increase in gold reserves since the global financial crisis.

One of the drivers is the increasing need to protect against economic and geopolitical risks. Gold stocks in advanced and emerging markets are rising with a measure of economic uncertainty, and stocks in advanced economies are also rising with a measure of geopolitical risk, the paper’s authors noted.

Another reason is the response to costs and relative returns. “When expected returns are high while returns on financial assets, such as U.S. Treasuries, are low,” the paper says.

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