Central banks’ record-setting gold purchases may be laying the groundwork for a new bull market in gold that individual investors should heed, experts say.

Just like institutional and everyday investors, central banks are buying gold to diversify their portfolios due to world instability and inflation. But they have an additional agenda, as well: to weaken the dollar.

In the first quarter of 2023, central banks added 228 tons of gold to their central reserves, 34% more than the previous Q1 record, according to the World Gold Council.

In 2022, central banks bought 1,136 tons of gold, a 152% increase from 450 tons in 2021—and the highest level of buying on record back to 1950.

No Default Risk

Peter Reagan, a financial market strategist at Birch Gold Group, tells Newsmax Finance that because gold bears no risk of default and outperforms other assets during times of crises, these are two other main reasons why central banks are acquiring gold at such a feverish pace.

However, China and Russia, in particular, have an additional agenda, Reagan says, which is “to weaponize the dollar.”

“Biden’s sanctions on Russia last year didn’t just freeze and confiscate dollars in Russian accounts, but also locked the entire nation out of the international banking network,” Reagan explains.

“Today, central bankers around the world are looking at their dollars as less of an asset than a liability,” Reagan continues. “Not only are these dollars losing purchasing power month after month—they could also be held hostage by the U.S. government at any time, for any reason.”

Keith Weiner, economist and founder of Monetary Metals, agrees, saying, “Russia is in particular need of a non-dollar reserve asset, as it has been shut out of the dollar system.”

China also wants to displace the U.S. dollar as the world’s primary currency, says Trevor Gerszt, founder and CEO of Goldco. “China continues to add to its gold stores as part of a long-term attempt to internationalize the renminbi and eventually displace the dollar as the world’s dominant currency.”

Other central banks are purchasing gold to hedge against great financial uncertainty in their countries, Gerszt continues. “One of the biggest buyers over the last few years has been Turkey, which is buying gold to bolster the lira and help cater to domestic gold demand,” Gerszt says.

Singapore, Asia’s No. 1 financial center, has been purchasing gold “to bolster its assets ahead of an expected economic slowdown,” he adds. “Various Middle Eastern countries have also been buyers—such as Egypt, Qatar, Iraq and the UAE. This could be due to hedging against the possibility of a decline in the oil price if oil demand drops during a recession.”

In fact, Wiener points out, “in the first quarter of 2023, Singapore was the biggest buyer of gold, at 69 tons, followed by China at 58 tons, Turkey at 30 tons, and India at 7 tons. The Czech Republic and Philippines were also buyers.”

Louise Street, senior market analyst at the World Cold Council, recently told CNBC, “Over the last two years, we’ve seen the importance that official sector institutions place on gold during times of crisis increase.”

Street further remarked on gold, currently trading at $1,923.49 an ounce: “Within the environment of high and rising gold prices, the mini banking crisis that we saw in March, continued high inflation and concerns around global economic recovery—that had a different impact on various sectors and geographics.”

Central banks looking to diversify their portfolios with a stable asset like gold is “obviously what helps to make it such a good strategic diversification asset,” Street says.

Softer Dollar Supports Gold

Gold prices held steady with support from a softer dollar Tuesday after the metal registered two sessions of gains, though investors remained cautious after recent hawkish comments from U.S. central bank officials indicating a need for higher interest rates.

Spot gold held its ground at $1,923.49 an ounce by 1014 GMT while U.S. gold futures were little changed at $1,933.10.

The dollar index eased slightly, making dollar-priced bullion more attractive for overseas buyers.

"Gold is seeing slight relief from the easing U.S. dollar today, even as it adheres to the downtrend that's been in place since early May," said Han Tan, chief market analyst at Exinity.

"Spot gold may revisit sub-$1,900 levels in the near term if markets begin to take heed of (U.S. Fedreal Reserve) Chair Powell's hawkish warnings and price in a second 25 bps rate hike by the Fed later this year."

With reporting by Reuters