There are a variety of reasons why central banks buy gold. Some central banks view gold as to hedge against economic and geopolitical risks. Gold is also seen as a store of value that can be used in times of economic or financial uncertainty. Additionally, central banks may use gold to support their domestic currencies. Gold makes up 73% of America’s foreign reserves.

Gold Is a Store of Value

Gold is a reliable store of value because it is a valuable commodity that has retained its value over time. Like other precious metals, gold has several special properties that make it both highly durable and relatively scarce. As such, it has only a very small number of natural resources — just enough to supply the world’s current demand. This rarity makes it highly valuable.

It’s a Great Investment Asset

Central banks also buy gold as an investment asset. Central banks purchase gold because it is their primary duty to encourage steady economic growth. Due to the possibility of market excesses, central banks must be able to use monetary policies to maintain robust but manageable markets. The ability to purchase and sell gold aids central banks.

 The value of a gold investment may rise and fall along with the paper assets that it’s stored in, but it can also maintain its value in the event of a financial market decline. A great investment asset, gold is also a secure investment asset. Unlike stocks that have a high rate of market volatility, gold has a very low rate of market volatility. This means that a portion of a central bank’s gold investment will maintain its value even in the event of a severe decline in the stock market.

Protects Against Inflation and Market Volatility

Central banks buy gold as an asset that protects against inflation and market volatility. The value of gold has remained relatively stable over time, making it a good hedge against inflation. The price of gold has fluctuated over time depending on supply and demand, but it has generally increased over time. Next, unlike stocks that have a high rate of the market volatility — especially in the cryptocurrency space — gold has a very low rate of market volatility.

Gold versus the US dollar

Since leaving the gold standard, currencies have gone through extreme fluctuations. Investing in things that are not tied to the dollar is one of the best ways for governments to protect themselves against inflation. The most popular option is precious metals, particularly gold at the institutional level. They can effectively support the dollar because they have reduced risks and ensured stability.

Bottom line

To reduce currency risks, central banks purchase gold and other precious metals. This is a tried-and-true tactic like the reason you would own precious metals. They can effectively support the dollar because they have reduced risks and ensured stability. Are you curious as to why central banks purchase gold and other precious metals?