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Key Takeaways:
Central banks play a major role in gold prices by buying, selling, and managing reserves, which directly impacts global supply and demand.
Monitoring central bank activity is valuable for investors, but successful gold investing requires considering multiple factors like inflation, interest rates, and geopolitical events.
Central banks are very much the elephants in the room when it comes to the gold market. The financial entities of sovereign governments have the resources to buy and sell tremendous amounts of gold at any given time.
Central banks also have the ability to store large amounts of gold in their reserves. How they choose to manage those reserves can have significant impacts on both the price of gold and how other investors execute their own strategies.
This page explores the role of central banks when it comes to the price of gold. We’re going to talk about how they move the needle, but also why they move the needle. So, let’s get started.
In many ways, central banks buy or sell gold for the same reasons that individuals do. It allows them to diversify their other assets and guard against the weakening of its own currency on the floating rate market.
More pointedly, gold serves as a backstop for the underlying economy, which may allow the central bank to raise its debt ceiling or otherwise allow for greater investments. Central banks attempt to read the tea leaves like any other investor and often go through frenzied periods of gold buying or selling.
Potential effects of these periods include:
Gold reserves are the stored gold pieces over which central banks exercise control. In other words, it’s the gold that a central bank owns.
Central banks hold gold reserves for many of the same reasons that individual investors keep gold. For one thing, the gold held in reserve helps the central bank hedge against economic downturns and the pressure they put on the bank’s other investments. Although it’s somewhat farcical, gold reserves can bolster central banks against the very inflation that they themselves have implemented.
More importantly, however, is the confidence that gold reserves can give to their own currencies or government economies. In essence, the country’s substantial gold reserves can underpin all or a portion of its entire economy.
No country has a greater reserve of gold than the United States. Estimates vary, but generally place American reserves north of 8,100 tons of the yellow metal – more than twice the reserves of Germany, the country with the second-largest reserves on Earth.
Perhaps the most shocking thing about the US gold reserves is that they are dramatically undervalued. Despite gold’s record prices of late, the American government uses the price of gold from 1973, a paltry $42.22/oz. As a result, the entirety of the gold stores are officially worth only $11 billion. If the gold under American control were revalued, it would likely be estimated to be worth more than $784 billion.
The legitimacy of the American system and economy – already the world’s largest – would benefit from an additional three-quarters of a trillion dollars of value. Other countries with major gold reserves – in addition to Germany, the top countries are Italy, France, Russia, and China – retain their stores for the same reasons.
Central banks can buy gold at almost any time. Barring any bureaucratic restrictions, they can adopt a new policy or modify an existing one to favor taking on large quantities of the yellow metal into their vaults.
Because the amounts of gold they buy can be large, they can significantly affect the active supply of gold available for purchase. Basic economics dictates that a decrease in supply, absent a concurrent drop in demand, results in a price increase.
Indeed, part of the reason behind gold’s continued rise in price in 2025 is due to the BRICS coalition (ten countries, including Brazil, Russia, India, China, and South Africa) buying immense amounts of gold in preparation for making a new gold standard-based currency. Similarly, Russia itself embarked on a gold-buying spree in the late 2010s that resulted in local effects on gold prices in Russia and the surrounding areas.
Even more broadly, the World Gold Council reports that central banks have purchased more than 1,000 tons of gold in each of the past three years. Most notably, they bought 1,081.88 tons in 2022 alone – a record amount.
Now, the actions of a central bank are not unknown to non-sovereign gold investors. They keep tabs on the movements of central banks as part of their decision-making for their own investments. Therefore, when central banks purchase gold, investors often follow suit.
So, central bank purchasing can lead to some short-term volatility in the price of gold. It is possible for short-term investors to realize some gains if they time things correctly.
However, neither central banks nor many investors buy gold to realize short-term profits. Instead, they seek to accumulate gold over the long term as a growing bulwark against inflation, geopolitical situations, and economic downturns.
On the flip side, if central banks decide to sell their gold, the opposite effect on the market occurs. The supply side of the equation increases, and – assuming demand stays roughly the same – the price of gold goes down.
A central bank might choose to convert its gold into cash to pay down debt or diversify its assets into other currencies or commodities. No asset is more liquid than cash, and the central bank may also be trying to free up some capital to make a purchase elsewhere.
However, unlike the additive situation with central bank buying, there is often a different reaction if a central bank sells off its reserves. The downward pressure on the price of gold affects the price of all reserves, and other countries don’t like that.
For instance, the United Kingdom famously sold off roughly half of its reserves between 1999 – 2002 in an event that came to be known as “Brown’s Bottom” – a reference to then-Prime Minister Gordon Brown. Gold prices dropped rapidly by around 10%, both due to the selloff and the rash of investors shorting gold in response.
Of course, other countries with their own gold stores didn’t particularly appreciate the value of their reserves dropping. The result was the 1999 Washington Agreement on Gold. Under the agreement, the European Central Bank and its 11 members, plus Sweden, Switzerland, and the UK, pledged to limit their annual sales of gold to just 400 tons for the next five years. Some of the countries (though not all) would go on to renew and abide by the terms of the agreement until 2019.
The agreement was allowed to lapse, however, because central banks are now much less likely to sell off gold. Rising inflation worldwide and the economic struggles of the 21st century has turned most central banks into net buyers of gold.
At the time of Brown’s Bottom, part of the criticism the Prime Minister endured stemmed from his decision to announce the Bank of England’s intention to sell off large portions of its gold assets. To be sure, those announcements undoubtedly precipitated the shorting of gold that took place during the period.
However, both the International Monetary Fund and the World Gold Council likely did or would have supported Brown’s decision to announce the bank’s plans ahead of time. For one thing, the announcement certainly followed in the spirit of the IMF’s Data Standards Initiatives, which were promulgated in order to enhance transparency among central banks. The DSI’s Special Data Dissemination Standard, which was published in 1996, provides guidance for central banks on best standards when it comes to releasing data information to the public. It requires its members to provide data in a timely and appropriate manner to the public.
Similarly, the World Gold Council provides Guidance for Monetary Authorities to help them engage in best practices with respect to accounting for their gold supplies and activities. Part of those practices involve transparency, and the WGC advocates this guidance due to the fact that, by its own estimate, sovereign governments and central banks own 33,000 tons of gold – assets worth more than $1 trillion with today’s gold prices.
The aim of all these standards is to avoid as many central bank surprises as possible. Sudden shifts in policy can create undue amounts of volatility within gold markets and have ripple effects in every country’s economy. So, the more advanced warning both investors and other central banks have, the gentler that price adjustments will be.
Gold is usually not the primary holding of central banks. Most of them keep a supply of various world currencies as the bulk of their assets that serve to backstop their economies. Of the various currencies, the most common and biggest portion of them is almost always the US dollar.
Using USD as a primary reserve currency has benefits and drawbacks. One of the drawbacks is that the fortunes of the central bank and, by extension, the country itself are tied to the movements of the American dollar.
Now, gold is the ultimate reserve, as it hedges against every fiat currency, including the USD. So, if a central bank grows worried about the strength of the US dollar, it may increase its accumulation of gold in order to balance against the weakening value of its other reserves.
Because many countries have significant value tied to the US dollar, their central banks must remain vigilant about the movements of the US Federal Reserve, the central bank of the United States. The Fed has many functions, but one of its most important is the setting of a target range for interest rates. Higher interest rates indicate a strengthening of the dollar due to the increased foreign investment that the rates attract.
In general, higher interest rates mean lower gold prices, but as mentioned, central banks have been loath to sell off their gold in recent years. However, when the rates drop, the price of gold increases and the value of the dollar goes down. So, central banks are more likely to increase their gold purchasing during periods when the American interest rate drops.
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Needless to say, central banks can play a major role in both the short-term and long-term outlooks for the gold market. They can materially affect both the supply and demand sides of the equation through their actions.
However, it is essential to keep in mind that central bank actions are not the only significant influence on the price of gold. In fact, there may be some factors, such as inflation or geopolitical conflict, that can have a deeper impact on how the price moves.
So, while watching the movements of central banks is a wise decision for your own gold investing, it should not be the only thing that you do. Successful gold investing requires a multidimensional approach, rather than an overreliance on a single factor as the principal determinant. Ultimately, you must make your own decisions.
Lastly, nothing in this page is meant to serve as investment advice to you. The information above is factual, to be sure, but we are not financial advisors in the slightest. So, use this page as a reference only, rather than as a guideline or tip sheet.
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