Central banks are increasingly buying gold from local mines as prices surge

Central banks are increasingly sourcing gold directly from domestic mines, a strategic shift driven by cost efficiencies, the ability to build reserves using local currency without depleting foreign exchange, and a desire to support local mining sectors. This trend, highlighted by the World Gold Council with 19 out of 36 surveyed central banks already buying domestically and four more considering it, allows nations to bolster gold reserves amidst elevated prices and geopolitical risks. While offering benefits like reduced transaction costs and potential formalization of artisanal supply chains, the strategy's overall cost-effectiveness can be impacted by the absence of domestic LGD refining capabilities, necessitating overseas processing.

Analysis

A significant structural shift is underway in central bank gold acquisition strategies, with a growing number of emerging market central banks opting to source gold directly from domestic mines. According to a World Gold Council survey, 19 out of 36 respondents are now engaging in this practice, up from 14 of 57 in the previous year's survey. This trend is driven by compelling financial and strategic advantages: it allows central banks to purchase gold using local currency, thereby growing reserves without depleting foreign exchange assets like the U.S. dollar—a crucial consideration amid rising global debt and geopolitical risk. Furthermore, domestic procurement can be cheaper, saving on international intermediary and shipping fees, with some central banks securing gold at a discount to the international price, currently at $3,328.3 per ounce after a 27% year-to-date rally. However, the cost-effectiveness is contingent on a country's refining capabilities. Nations without domestic London Good Delivery (LGD) accredited refiners, such as Ghana and Zambia, face additional overseas processing costs that can offset initial savings, unlike countries like the Philippines and Kazakhstan which possess this capacity. The strategy also carries ESG implications, as central bank involvement in purchasing from artisanal and small-scale miners (ASGM) presents an opportunity to formalize these sectors, improve traceability, and mitigate risks associated with poor labor practices and illegal smuggling, creating a potential 'win-win' scenario.

Key Decisions for Investors

• This trend provides a new, structural layer of support for the gold price, as it creates a consistent demand source from official sectors in producer nations, reinforcing the metal's status as a key reserve asset.
• Investors in the mining sector should evaluate companies with operations in countries implementing domestic purchase programs (e.g., Ghana, Tanzania), as these policies can offer a stable, government-backed revenue stream for a portion of their gold output.
• The critical importance of LGD-standard refining highlights potential opportunities in ancillary services; markets and companies developing or possessing accredited refining capacity may see increased strategic value and business flow.
• ESG-focused investors should monitor the development of these domestic purchasing programs, as successful formalization of the artisanal and small-scale mining supply chain could create a positive impact narrative and reduce reputational risk for participating countries and miners.