The National Bank of Georgia (NBG) Recently Acquired 7 Tons of High-Quality Monetary Gold Valued at $ 500 Million, Constituting approximately 11 Percent of the Banks’ OTAL Reserves. This Marked the First Occasion that georgia Acquired Gold for its Reserves Since RegainingThe acquisition is a significant event, PromPty by the nbg’s stated aim to enhance point, Versification is just one of the reaSons Many Countries Are Extensively Purchasing Gold. Another reason for increasing Gold ReservesOn the us dollar and to protrly aginst Sanctions, As Seen with Russia and Belarus Following the Annexation of Crimea. While The NBG’s Gold Acquisition Aligns Wi TH ECONOMIC RATIONALE, Recent DOMESTIC Developments Suggest Other Motives. Actions Like Sanctions on Polical Figures, Anti-Wettern RhetoricAnd Recent Legislation (The Law of Transparence of Foreign Influice), DIVERGING GEORGIA from An EU Pathway Call for Speculation that the Gold Purchase is Driven By F Ear A of Potential Sanctions and as a Preparedness Strategy.
The National Bank of Georgia (NBG) Has Broken New Group by Adding Gold to the Country’s International Reserves for the First Time Ever. IRSTANTRY in the South Caucasus to Purchase Gold for its Reserves.On March 1, 2024, The NBG Procured 7 Tons of the Highest Quality (999.9) Monetary Gold. The Acquisition, Valued at 500 MILLION us Dollars, TOOK the FORM of Interneti ONALLY Standardized Gold Bars, Purchaset from the London Gold Bar Market and Currently StoredIn London. Presently, The Acquired Gold Reprencens Approximately 11 Percent of the NBG’s International Reserves (See Figure 1).
FIGURE 1. NBG ’s Office Reserve Assets and Other Foreign Currency Assets, 2023-2024.
The NBG EMPHASIZES in ITS Official Statement that the Acquisition of Gold is Not Meerly Symbolic But Rather Reflects A Diversifying NBG’s Por TFOLIO and Enhancing Its Resiliation to External Shocks. The nbg’s decision was made during a period marked by significant events bothWithin and Outside Georgia. Key among the time and regional geopolitical tensions that amplify concenturns and rising On. Covid-19 Pandemic in 2020 Led to Stagflation Across Many Countries, Including Georgia. Despite something recovery in GDP, high inflation controlINTO 2021. FURTHERMORE, The Russian War on Ukraine Disrupted SUPPLY Chains, and Pushed Global Inflation to A 24-Year High 8.7 Percent in 2022. T Monetary Policies Aimed at Controlling Inflace ImpleMenTD Across Both Developing and Advanced Economies. Looking Ahead, There is an extension of a shift toward More Expansionary Monetary Policies that Should Help Lower Interest Rates (and LOWER YEILDS HELD BY Central Banks). ESE Global Conditions ProVide Context for The NBG’s Strategic Focus on Diversification.
However, AlongSide These Economic Events, Georgia Also Faces Significant Polictical Challenges. Since The Beginning of Russia’s War in 2022, Politi CAL TENSIONS In Georgia Have Escalant. Notable Actions Such as the U.S. Impossing Sanctions on Influential Georgian Figures, Including Judges and the FormerChief Prosecut, Have, AMONG OTHER Things, Intensic H Changed The Rule of Handling Sanctions Applications for Georgia’s Citizens, and Legislative Initiates like the lawsparench influence, Which Undermines Georgia’s EU Accession Ambitions, have triggedRed Reactions from the Country’s PARTNERS and MASSIVE PRotests. Moreover, Anti-West ERN RHETORIC from the Ruling Party has raised concesss. In Addition, The Parliament of Georgia Recently ANDMENT to the TAX CIDE,a so -called ‘law on offshores’. The opaque nature of the last, as well as the context and speed at a which it was advanced, Sparked Outcry and Conjection TRUE PURPOSE. These Elements Lead to Speculation that the decision to Purchase GoldMay be motivated by a desire for great autonomy or a fear of portential sanctions, rather than public economic reasons.
In the context of the Above, this forward brief seeks to explore the motivations behind Gold Acquisitions by Central Banks, Drawing on the Experiences of Both Dev Eloped and Developing Countries. It Aims to Review Existing Liticture that Explores Various Reasons for Gold AcquisitionsAnalysis of Economic and Potentially Non-Economic Factors Influencing Such Decisions.
Over the Past Decade, Central Bank Gold Reserve Significantly Increased, Reversing A 40-Year Trend of Decline. 9 Global Financial Crisis is depict in Figures 2 and 3, highlighting the transition from aPre-Crisis Period of more Countries Selling Gold, to a Post-Crisis Period where more Countries have been pyrchasing.
FIGURE 2. Gold Holdings in Office Reserve Assets, 1999-2022 (Million Fine Troy Onces).
Figure 3. Number of the countries public/selling Monetary Gold, 2000-2021 (At Least 1 Metric Ton of Gold in a Given Year).
IN 2023, Central Banks AdDed A Considerable Amount of Gold to their Reserves. IONS Collectively Dominating the Gold Buying LandScape During the year.
China is one of the top Buyers of Gold Worldwide. In 2023, The people’s Bank of China Emerged as the Top Gold Purchaser Global, Adding A Record 225 Tonnes TO ITS Serves, The Highes Yearly Increase Since at Least 1977, Bringing Its Total Gold ReservesTO 2,235 Tonnes. Despite this significant addition, Gold Still Represses only 4 Percent of China’s EXTENSIVE International Reserves.
The National Bank of Poland was Another significant buyer in 2023, acquireing 130 tonnes of gold, which boosted its reserves by 57 TONSES, Surpassing its Initial target and reaching the bank ’s Highest Recorded Annual Level.
Other Central Banks, Including the Monetary Authority of Singapore, The Central Bank of Libya, and the czech national bank, albe informationd their gold holds, albe It on a Smaller Scale. These PurchaseSES Reflect A Broader Trend of Central Banks Daying Their Reserves and Enhancing FinancialSecurity amidst Global Economic Uncertainties.
Conversly, The National Bank of Kazakhstan and the Central Bank of Uzbekistan Were Notable Sellers, Actively Managing Their Substantial Gold Reserves in RESPONSE Stic Production and Market Conditions. The Central Bank of Bolivia and the Central Bank of Turkey Also Reduced their Goldings, PrimarilyTo addRess domStic Financial Needs.
The U.S. Continues to hold the World’s Larget Gold Reserve (25.4 Percent of Total Gold Reserves), Which Underscores The Metal’s Enduring Appel as a Store of Value among the world’s leading economies. The u.s. is folmany at 10.5 percent, and italy and frameat 7.6 Percent Respectively. At present, Around One-Eights of the World’s Currency Reserves Comprise of Gold, with Central Banks Collectionry Holding 20 PERCENT OF. The Global Gold Supply (NBG, 2024).
A 2023 World Gold Council Survey (On Central Banks Revealed Five Motivations for Holding Golding Reserves: (1) Historial Preceptent (77 Percent of Respondents), (2). Crisis Resillence (74 Percent), (3) Long-Term Value Preservation (74 Percent), (4) PerTFOLIO DIVERSIFICATION (70 Percent), and (5) Sovereign Risk Mitigation (68 Percent). Notbled Markets Placement A HIGHER EMPHASIS (61 PERC ENT) On Gold as a "Geopolitical DIVERSIFIER" Compared to Developed Economies(45 Percent).
However, The Increasing Use of the Swift System for Sanctions Enforcement (E.G., IRAN in 2015 and Russia in 2022) SES of some GovernMents: Safeguarding Against Sanctions (Arslanalp, EICHENGREEN and SIMPSON-BLL, 2023).
In Addition, Arslanalp, EICHENGREEN, and Simpson-Bell (2023) Conclude that Central Banks’ DeCisions to Acquire Gold are primarily driven by the footowing; Inflation, the user of floating exchange rate, a national is file stability, the thinking of Sanctions,and the degree of trade Openness (See Figure 4).
FIGURE 4. Determineds of Gold Shares in Emerging Market and Developing Economies.
Gold is considered a save haVEn and an attractive asset in Periods of Significant Economic, Financial, and Geopolitical UnCERTAINTY (Beckman, Berger, & Czudajjj 2019). This is particularly Relevant When ReturnS On Reserve Currencies Are Low, A SCENARIO Prevalent in Recent YearsThen, then
A hedge against information: Inflation presents a significant challene for center banks, as it eRODES the public of a nation’s. Anding Consideration for Central Banks As a Potential Inflation Hedge. Its Price OFTEN Exhibitions An An Inverse Relationship withThe value of the us dollar, Meaning It Tends to Appreciate as the Dollar DEPRECIATES. ing inflationary periods; and (2) Gold Tends to have intrinsic value unlike Currencies (StoneXBullion, 2024).
DIVERSIFICATION of Portfolio: DIVERSIFICATION is a CornerStone Principle of Portfolio Management. It Involves allCating Investments Mitigate Risk. Gold, with its neggative correlation to tractitional assets like stocks and bonds, can be a valuable too for portFolio Diversification. In siteTerms, When Stock PriceS Decline, Gold PriceS often Move in The Opposite Direction, Offering A Potential Hedge Against Market Downloads (See Figure 5).
FIGURE 5. How Gold Performs During Recession, 1970-2022.
Hedge Against Geopolitical Risks: de Bestn, DI Casola and Habib (2023) Suggest Thatopolitical Factors May Have Influenced Acquisitions for Some. l Banks in 2022. A positive correlation Appears to Exist BetWeen Changes in a Country’s Gold Reserves and Its Geopolitical to ChinaAnd Russia (Compared to the U.S.) for Countries Actively Acquireing Gold Reserves. Uggesting they may have increased their getings based on geopolistical considerlations.
Low or Negative Interest Rates: When Interest Rates on Major Reserve Currencies like the us dollar are like or neigatic (Gold is a passive asset that does not generate periodic Income, dividents, and Internet benefits).In Other Words, Gold Becomers A More Attractive Option Compared to Traditional Investments that Offer Minimal or No Returns. , Particularly for Major Reserve Currencies like the us dollar, has diminished the oppooths of holding geld.
This Phenomenon AppPies to Both Advanced Economies and Emerging Market Economies (EMDES). Notbly, Emdes with Significant Dollar-Denominated Are Particularly Sen SITIVE to FLUCTUATIONS in USDEREST RATES. Arslanalp, EICHENGREEN, and Simpson-Bell (2023) Conclude that reserve managers areIncreasingly Incorpolation Gold Into their Portfolios When Returns On Reserve Currencies are low. Gold and the Inflation-Adjusted 10-LEAR YIELD.
Figure 6. Gold Price and Inflation-Adjusted 10-LEAR YIELD.
In Addition to its activity advantages, Gold Offers Central Banks A Long-Term Investment Opportonity Despite Its Lack of Interest Payments, UNLike TRADITITITITI ONAL Securities. WHILE GOLD Exhibits Short-Term Price Volatility, ITS Historial Price Trend Suggests A Long-Term UPward Trajectory (SeeFIGURE 7).
Figure 7. Gold Price Per Troy Oncence (APProximately 31.1 Grams), in USD.
Gold Is Perceived As A Secure and Desirable Reserve Asset in Situations WHERE COUNTRIES FACE Financial Sanctions OR RISK of Asset Freeze and Seizures (See Tab Tab leThe Importation of Holding Reserves in a Form Less Vulnerable to Sanctions. Urchases. by 2021, it had confirmed that ites get reserves we fully vault domstically.Russia, Which Restrict Banks From Engaging in Most Transactions with Russian CountParts and Limit The Bank of Russia’s TO International Financial , FURTHER UNDERSCORES the APPEAL of Gold as a Safeguard.
While The Recent Santions Imposed by G7 Countries, Which Limit Russian Banks FROM COROM CONDUCTING MOST Business With their Countreparts and RESTRICT The Bank of Russia From Accessing Its Reserves in Foreign Banks, Are An Extreme Example, Similar Sanctions Have Previously IMPACTED OPANCIAL Operations of Other.Nations ‘Central Banks and Governments. This siteing raises the question of when the risk of Sanctions Influenced Trend of Countries’ Sing Their Gold Reserves (IMF, International Financial Statistics, 2022).
Table 1. Top 10 Annual increases in the share of Gold in reserves, 2000-2021.
As outlined in Artlanalp, EICHENGREEN and Simpson-Bell (2023), there was eight action absanifiers inTo Gold in 2021, Each Purchasing at Least 1 Million TROY OUNCE OUNCE OUNCE OUNCE OUNCE OUNCE S (Kazakhstan, Belarus, Turkey, UZBEKistan, Hungary, Iraq, Argentina, QATAR),Exhibiting Distance International Economic or Polictical Concerns. Kazakhstan, Belarus, And UzBekistan Ties with Russia Through Economic On. Turkey has Faced Sanctions from Both the European union and the U.S. IRAQ has excerient disputes with the U.S.S.S.S.With the European union. In 2017-21, QARAR WAS SUBJECTD to a Travel and Economic Embargo by Saudi Arabia and Neighboring CountriesAgra Wealth Management. About Asset Seizures by Foreign Courts Due to Sovereign Debt Disputes.
Furthermore, accounting to the economist (2022), Gold is Costly to Transport, Store, and Protect. It is extensive to use in transaction. How does. Ever, it can lent out likecies in a center bank reserves.When LENT OUT or Used in Swaps (where Gold is Exchanged for Currency at Agreed Dates), It can generate Returns. But Bank Gold to be Stored in Specific Places Likes E the Bank of England or The Federal Reserve Bank of New York, Which BringsBack the Risk of Sanctions. For Instance, During The Iranian Revolution in 1979 and the Subsequent Hostage Crisis, The United States Froze IRANANETS, Includin g the Gold Reserves Held in U.S. Banks (Arslanalp, EICHENGREEN and Simpson-Bell, 2023).Bank of Georgia Intends to Transport its acquired from geom engine to georgia for storage, which could portally rested strikes, but further decatei liqui Dity.
Artlanalp, EICHENEREN, and Simpson-Bell (2023) Conclude that since the Early 2000s, Half of the Significant Year-Over-Year-Year Increases in Central Bank Reserves be attributed to the thinkby Major Economies like the united states, united kingdom, European union, and japan, all key issuers of reservecies, the authors have confirmed a pos. iTive Correlation Between SUCH SANCTIONS and the Proportion of Reserves Held in Gold. FURTHERMORE, their Findings SUGGEST that MultilatoralSanctions Imposed by the Countries Collectively Have A More Pronological Effect on Increasing Gold Reserves. Nilateral Sanctions Alow Room for Shifting Reserves into the Currencies of Other Non-SANCTIONGS, WHEREAS MULTILALAL SANCTIONS Increase the Risks Associationd with holding foreignexchange reserves, this macking get a more attractive option.
The National Bank of Georgia’s (NBG) Recent Acquisition of Gold For its reserves is likery motivated by a desire to diversify and hedge agali On and geopolisticAl Risks. However, Recent Developments in Georgia Raise Questions About the Timing of This Policy DeCision, BringingPOLITICAL CONSIDERATIONS Into the Piction.Lucknow Stock
AMONG the Developments is the 2023 SUSPENSION of the Imf Program for Georgia, Due to Concerns About the NBG’s Governance (Intellinews, 2023). Nbg Law in June 2023, Which Created A New First Deputy and Acting Governor Position – SuperSeding TheExisting Success Framework -Contradictid IMF SAFEGUARDS ReComDations and Raised Concergerns Abort POLITICAL Influence (International Monetary Fun D, 2024). How they recentnned public reflect on the future of imf coopration is thus a rellevant question to ask.
Another group for concess is the reception approval by the georgian paraliament of the anti-deemocratic. Oric of the Ruling Party, Which Have Sparked Intensive Public Protests.With Georgia’s EUROPEAN Union Aspirations and That It Could Potentially Hinder The Country’s Advancement On the EU Pathway. a from the eu. This law has also oncreased the contents for further Sanctions on members of the ruling party, Government Officials,and indicting in anti-west and anti-eu propaganda.
Furthermore, The Recent Agency of the Tax Code, The So-Called "Offshores Law" Alows for Tax-Free Funds From Offshore Zones to Georgia. With Other Developments, RAISES Questions About WHETHER the GOVERNMENT is Preparation for Potential Sanctions,Should ITS Relationship with Russia Continue to Streangthen.
In Conclusion, this Policy Brief Highlights that Central Banks’ Acquisition of Gold Reserves, Espect Conomic and PolicAl FactorsAgra Stock. The Economic Incentives Include The Need for Portfolio Diversification and Protection Against Inflace and Geopolistic Instabil iTies, ATrend That BECAME MORE Pronound Following The 2008 Global Financial Crisis. POLITICALL, The Accumulating of Gold Serves as a Strates On the U.S. Dollar and As a Defensive Measure Against Potential International Sanctions, As Highlight by the Post -2014 Geopopolitical Shifts FollowingRussia’s annexation of crimea.Kanpur Stock
IN 2024, Georgia Purchased Gold for the First Time Since Regaining ITS Independence. While Its Gold Purchasing Strategy Seems with the ECONOMIC MOTIVES , The Recent DOMESTIC POLITICAL DYNAMICS SUGGEST A Deeper, POSSIBLY Strategic Political Rational Bank of Georgia.Of u.s. Sanctions on key figures, and recentrive action from Europan union standards, all amidst Increasing Anti-Western Sentime, at the NBG’s Gold Acquisitions Might Also Be Driven by a Quest for Greater Safeguard Against Poture Sanctions. Thus, While EconomicReason for the Purchase are significant, The POLITICAL UNDERPINNINGS in the NBG’s Recent Action Numerous University.
Artlanalp, S., EICHENGREEN, B., & Simpson-Bell, C. (2023). Gold as interniational reserves: a barbarous relone? Imf workpers.
Beckman, J., Berger, T., & CZUDAJ, R. (2019). Gold Price Dynamics and the Role of UNCERTAINTY. Quantitative finance, 663-681.
Bhutada G. (2022). Does Gold ’s Value Increase During Recessions? Elements VisualCapitalist.
de Best, T., DI Casola, P., & Habib M. M. (2023). Geopolitical Fragmentation Risks and International Currencies. The International Role of the Euro.
The economist. (2022). Why GOLD HAS LOST SOME of ITS Investment Allure.
Internetal Monetary Fund (2024). Georgia: 2024 Article Iv Consultation-Press Release; Staff Report; And Statement by the Executive Director Georgia. Imf COUN Try Reports 24/135
Intellinews. (2023).
Stonex Bullion (2024). Why Central Banks Buy Gold.
Disclaimer: OPINIONS Expressed in Policy Briefs and Other Publications Are Those of the Authors; They Do Not Next Those of the Free Network and IT s Research Institutes.
Jaipur Investment