Good morning Ladies and Gentlemen 

I am very honored with the invitation to deliver, representing the Banco de Portugal, these remarks at the opening session of the LBMA (London Bullion Market Association) Conference, the first in person event after the pandemic, about a subject that is so relevant to central banks and in particular for Banco de Portugal. 

The London Bullion Market Association has been essential in developing the bullion market by promoting good trading practices and establishing stringent standards.

As you know, central banks are among the world’s largest holders of gold reserves. 

Traditionally, central banks have held gold because it is the ultimate FX reserve asset to possess in an emergency. 

Gold is a highly liquid asset that can be easily sold in case of emergency to address urgent liquidity needs of the government or to conduct foreign exchange operations. 

Gold is the only reserve asset that is free from political and credit risk. 

These characteristics of gold mean that, in an environment of political or economic crisis, the gold market often experiences safe-haven inflows leading its price to rally, offering protection to investors, when it is most needed.

The recent COVID-19 crisis provides an excellent example of this. 

During the beginning of the pandemic when the level of uncertainty was high,  there were strong flight to-quality flows leading the price of gold to rally by almost 17% (in US-dollar terms) in the first half of 2020, significantly outperforming other major asset classes, like US equities that experienced a significant sell-off at the beginning of the pandemic crises .

Gold also has become an important element in some central bank’s reserve management strategy because it is a way to diversify portfolios and to improve the risk-return profile over the medium to long term, given the historical low correlations with the other traditional reserve assets. 

Central Banks investments objectives tend to rely on the liquidity and security of its assets, prioritizing capital preservation over the long term. 

Gold characteristics are well aligned with these principles. Indeed, in times of crisis, gold has a negative correlation to risk-prone assets, delivering in most cases positive returns. In the last two decades, gold has outperformed many other asset classes. 

In times of economic growth, this correlation can become positive because gold is also a consumer good and, thus, when wealth increases demand for gold increases as well. 

The relevance of Gold to the Central Bank of Portugal

Banco de Portugal is one of the world’s largest holders of gold. 

We currently rank number 14 according to the World Gold Council. 

Banco de Portugal holds the gold on behalf of the Portuguese state. 

Our gold holdings increased significantly between the 1950s decade until 1976, following a government strategy to accumulate this metal. 

From this peak, and taking into account that we were already one of the central banks with more gold, our holdings have decreased remaining unchanged since 2006.

As is the case for many other central banks, gold is now an important part of our reserve management strategy. 

Banco de Portugal has been actively managing part of its gold holdings to enhance returns in the derivatives market since 1998. 

Around half of our gold holdings, which are located at the Bank of England, the Bank of International Settlements and at the Bank of France, are currently available and being used for investment purposes, in London and in Paris. Most of the reserves held in our own vaults also fulfil the criteria to be considered London Good Delivery. 

Since 2016, Banco de Portugal has been particularly active in the gold swap market, with good returns. In 2021, Banco de Portugal’s returns from this activity reached its highest value ever.

Looking ahead

Looking ahead, gold will continue to be a key element in our reserve management strategy, especially considering the level of uncertainty about the future economic outlook. 

As you know, price pressures have broadened across the economy in the euro area since the second half of 2021. The surge in inflation was initially driven by supply restrictions due to the disruption of the global supply chain, which was a result of the Covid-19 lockdowns, and, to a lesser extent, some pressure from demand. 

When these disruptions were beginning to fade, a second shock disrupted the world economy once again. Russia’s unjustifiable invasion of Ukraine has sent energy prices to new highs and has created geopolitical instability that we have not witnessed since the end of the cold war. 

The final consequences of this are not yet clear. Russia and Ukraine are also major producers of other commodities like wheat, which makes the world economic outlook even more challenging. 

High inflation, tighter financing conditions and supply constraints due to the war in Ukraine have slowdown the euro area economy.

In this context of high uncertainty, demand for gold is likely to increase mainly for two reasons: 

• On the one hand, because gold has been on several occasions in the past an efficient hedge against inflation, most notably throughout the 1970s when oil price shocks drove average annual inflation in the U.S. to around 8.8%.
  Investors wanting to hedge their portfolios against rising price pressures might consider including gold in their portfolio. 
• On the other hand, because in times of turmoil, investors turn to safe assets and gold is considered one the safest assets. 
  During the sovereign debt crisis and more recently during the Covid-19 crisis, as I mentioned earlier, the price of gold rallied and the return on this investment was higher than the one on other safe heaven alternatives, namely sovereign debt. 

While it is true that after the start of the war in Ukraine, when there was a generalized risk-off movement, since March gold prices have fallen. 

We can argue that this is occurring in a context of USD dollar appreciation against most currencies, driven by a faster monetary policy tightening in the US than in the rest of the world and, perhaps predominantly, from some safe haven inflows into US dollars. However, even in this context of dollar strength, gold has outperformed equities and sovereign bonds. 

Let me finish by reaffirming my belief that gold is, and will continue to be, an essential element of an investment portfolio; it offers attractive returns in good times, protects the portfolio from losses in turbulent times, offering some protection against inflation over the long term. 

Ladies and Gentlemen, thank you very much for your time and enjoy the rest of the conference.

I hope you enjoy our country, our city, our excellent food, wine, and mainly our great hospitality.

Thank you