China Securities Co., Ltd.: From over-the-counter trading and local direct procurement to tri-city cellaring, in-depth analysis of central bank gold purchases.

China Securities Co., Ltd. released a research report stating that 2025 is an inevitable year in the history of gold, not only because the price of gold has risen significantly in a single year, making precious metals the most outstanding asset among many, but also because the current central bank's gold reserves amount to 36,000 tons, approaching the era of the Bretton Woods system. The current market value of the gold held by the central bank exceeds $4 trillion, surpassing the euro reserves and approaching the US dollar. After the sharp rise in gold prices, the market is concerned about future trends, especially focusing on the purchasing power of central banks in recent years. Central banks have not only been making large-scale and fast purchases of gold, but have also engaged in unconventional operations such as the "repatriation of gold." After dissecting the micro-logic of central bank gold purchases and holdings, it is revealed that the data provided by the World Gold Council is not a complete picture of central bank gold purchases. The turbulent international political situation in recent years has led central banks to increase their gold holdings for strategic reasons through various channels and storage methods, making it difficult to track central banks' gold purchases through traditional channels. The main viewpoints of China Securities Co., Ltd. are as follows: Based on market prices, the value of gold has exceeded $4 trillion. Last year, the proportion of gold in global foreign exchange reserves rose to 20%, surpassing the euro at 16% and becoming the second largest reserve asset in the world after the US dollar at 46%. Central bank gold purchases have become an important force in gold analysis in recent years. However, details about central bank gold purchases, such as the micro-operations - how central banks buy gold, where they store gold, and the data on central bank gold purchases and reserves reflect which caliber of central bank gold behavior, are lacking systematic research. This article aims to answer these practical detail questions. I. How do central banks buy and sell gold differently? A considerable proportion of gold assets held on the balance sheets of central banks are historical legacy assets and not newly acquired. In the 1990s and early 2000s, central banks were net sellers of gold, but since 2010, central banks have become net buyers of gold. Our discussion on central bank gold reserve behavior focuses on gold purchases and reserve management after 2000. There are two main ways for central banks to increase their gold reserves through international reserves - buying gold through the global Over-the-Counter (OTC) market or buying gold produced in their own country. An additional supplementary method is to conduct transactions with the International Monetary Fund (IMF) through independent non-OTC transactions. In addition, some central banks are also considering acquiring gold exposure through exchange-traded funds (ETFs), but this is generally not done as a reserve asset. (Channel One) OTC Market Global channel The World Gold Council points out that the most common way for central banks to increase their international reserves by buying gold is through the Over-the-Counter (OTC) market. The OTC trading mechanism in the London gold market is very similar to the secondary trading mechanism of the banking system. LPMCL mainly uses an electronic clearing system called AURUM, linking its LBMA member banks with clearing qualifications (JPMorgan Chase, ICBC Standard Bank, HSBC, and UBS) to fulfill its mission as the Loco London clearing center. In the London market, a large amount of gold trading is completed in a "non-physical movement" manner. Because when a central bank buys gold from a counterparty, the gold bars may not physically move, but ownership transfer takes place internally in the clearing system. Even if a central bank decides to bring some of the gold back to its own country, the entire process is highly confidential and details are not disclosed. (Channel Two) Purchase local gold Countries with abundant gold resources may choose to increase their gold reserves through direct purchases of gold produced domestically. A typical example is the gold purchasing plan of the Central Bank of the Philippines (BSP), which directly purchases unrefined gold from small-scale producers domestically, and the Central Bank of Uzbekistan (CBU) has the right to purchase gold produced locally. (Channel Three) Conducting OTC transactions with the IMF This method of increasing gold reserves is relatively rare and is an additional supplementary method for central bank gold purchases. IMF gold sales are mainly to raise funds for specific projects (such as low-income countries), usually through OTC transactions, not through regular gold market exchanges, but through negotiations and transactions directly between the IMF and various central banks. IMF gold is usually held in designated delivery warehouses, such as in New York, London, Shanghai, and Paris. Transactions must follow the IMF's Articles of Agreement and generally require approval from the majority of member countries. (Channel Four) Increasing gold exposure through gold ETFs Unlike the daily trading needs of financial market investors, the requirements of reserve assets for security, liquidity, and asset attributes make it difficult for central banks to use gold ETFs as a mainstream channel to increase gold exposure. II. How is a vast amount of gold stored, especially by central banks? Global gold storage management is a diverse system consisting of central banks, commercial banks, and professional custodians. The operation mode of warehousing and delivery infrastructure can mainly be divided into the "internal mode" and the "outsourced mode." The internal mode usually refers to the country's central bank or large financial institutions building and operating their own gold vaults, with their own warehousing and delivery operations, with the core advantage of absolute control and security of gold assets. The outsourced mode relies on third-party institutions to provide warehousing, delivery, and logistics services, with the core value lying in transaction efficiency, reducing overall costs, and forming strong market liquidity. It is important to note that the two modes are not mutually exclusive, but rather show a trend of integration. The Hong Kong International Gold Trading Center currently under development embodies this integrated thinking. The three pillars of global central bank gold custody are the New York Fed, the Bank of England, and the Bank for International Settlements. The formation of this structure is the result of historical choices, market practices, and geopolitical influences. Although not all countries disclose the specific location and quantity of their gold reserves, according to estimates by the Singapore precious metals trading firm Bunker Group, the United States and the United Kingdom are the largest gold-holding countries in the world, with the two countries storing approximately 53% of the world's gold reserves. III. What are the differences in motivations behind different storage modes for central banks? Central banks in different countries have three modes of storing their gold reserves, reflecting different strategic tendencies. Mode One: Domestic Storage, emphasizes sovereignty and security. The all-domestic storage mode involves storing 100% of gold reserves or the vast majority of gold reserves within the country's borders, with China being one such example. Aside from China, countries such as the United States, France, Russia, Poland, Turkey, Saudi Arabia, the United Kingdom, Spain, among others, also store all or the vast majority of their gold in domestic vaults. These countries either have enough storage space and conditions for gold or have strong financial security demands. Mode Two: Domestic and International Diversified Storage, due to historical reasons and to balance risk and convenience. The domestic and international diversification mode is the most common strategy, considering historical reasons, strategic security of reserve assets, and liquidity management. Representative examples include European countries like Germany, Italy, the Netherlands, Switzerland, Portugal, Austria, Belgium, and others. Mode Three: Non-disclosure of storage locations. A considerable number of countries choose not to disclose details of where their gold is stored. This includes countries like Japan, Kazakhstan, Uzbekistan, Thailand, and others. IV. Central Bank Gold Purchases: Known and Unknown The channels through which central banks increase their gold reserves are mainly divided into two categories - one relying on the LBMA international system and the other beyond the LBMA system. The strategic demands of central bank gold purchases and the diversity of purchase channels objectively increase the difficulty of tracking central bank gold purchase data. The World Gold Council's gold purchase data system is the core basis for analyzing the dynamic changes of official institutions' gold reserves. To effectively use disclosed gold purchase data, attention needs to be paid to two key points - the lag in IMF reporting data and the "black box" of data from non-LBMA channel purchases. Firstly, due to security strategy demands, some central banks may delay or choose not to disclose their gold purchases, leading to underestimation in IMF "reporting data." Secondly, non-LBMA channel gold purchases do not use foreign exchange reserves and usually do not affect the amount of US Treasury holdings in related countries. Local direct purchases usually do not involve changes in trade flows, making tracking more difficult. The three central bank gold storage models globally are the New York model, the London model, and the domestic or tripartite model. These models seek to balance transaction convenience, sovereignty control, and geopolitical risk. The choice of storage mode by central banks is not static, but based on deeper strategic considerations. The highly concentrated global gold reserves in the United States and the United Kingdom can be attributed to historical path dependence. In the backdrop of strengthened financial sovereignty awareness, central bank gold reserves are also experiencing dynamic balance. Most central banks actually adopt a mixed strategy to balance convenience and security.