Central Banks May Need Decades of Gold Buying to Reach Efficient Allocation

Central banks have been major players in the gold market since Russia's invasion of Ukraine in February 2022, and their buying has driven a three-year bull market in bullion. According to BofA, central-bank purchases have recently exceeded 1,000 tonnes per year.

BofA estimates that under-allocated institutions may need more than 20,000 tonnes to reach what it views as an efficient reserve allocation. The firm uses a framework where gold accounts for 30% of total reserve assets, the level at which its commodities team estimates the information ratio of an average central-bank portfolio is maximized.

On a global basis, central banks would need to purchase just under 2,300 tonnes to reach that threshold, equivalent to roughly two years of buying at recent rates. The potential is much larger when central banks already holding at least 30% of reserves in gold are excluded, with BofA estimating the remaining institutions would need to acquire about 20,333 tonnes.

China has the largest potential shortfall among individual central banks below the threshold, with an estimated 5,628 tonnes needed. Other countries that require more than 700 tonnes include Taiwan, South Korea, Saudi Arabia, and Singapore.