Central Banks Urged to Keep Buying Gold Despite High Bond Yields

Bundesbank President Joachim Nagel has reinforced the argument for central banks to continue diversifying into gold, despite rising bond yields. Speaking at the London Bullion Market Association's annual conference in Sorrento, Italy, Nagel highlighted the ongoing geopolitical tensions and the credit risks associated with high government debt as key reasons for holding more gold. He emphasized that physical gold carries no counterparty risk, unlike foreign securities and deposits that can be frozen by sanctions.

Nagel's remarks carry significant weight, given that the Bundesbank holds over 3,500 tonnes of gold, the second-largest official holding in the world. While he acknowledged that higher yields make bonds more attractive to reserve managers, he argued that gold remains a crucial asset for central bank reserves. Other speakers, including Bank of Italy Deputy Governor Sergio Nicoletti Altimari, described gold as arguably the safe haven asset, noting that its traditional inverse relationship with real yields has weakened due to concerns over public debt and fiscal expansion.

However, not all signals support continued strong demand for gold. Consultancy Metals Focus expects central bank gold demand to slow by about 15% this year, to around 720 tonnes. Despite this, endorsements from major European gold holders suggest that reserve diversification will continue to underpin demand, even as higher yields weigh on prices in the near term.