Gold prices fell on Tuesday, retreating from near a four-week high, as a modest rise in the dollar weighed on the metal, although uncertainty over the U.S.-China trade agreement kept investors cautious and limited the bullion's decline.

Sven Hoppe | Picture Alliance | Getty Images

Central banks are increasingly looking to bolster their gold reserves. And they are turning to mines in their backyard to source the yellow metal.

Besides being cheaper, securing gold directly from mines helps support local industry and bolsters reserves without weighing on foreign exchange reserves, experts said.

While countries such as the Philippines and Ecuador have been doing this for years, more central banks with access to domestic gold mines have started, increased, or are considering direct local purchases, according to the World Gold Council.

Nineteen out of 36 respondents in the World Gold Council's latest central bank survey said they are buying gold directly from domestic artisanal and small-scale gold miners in local currency. Four are thinking of following suit. This is a slightly higher figure than last year's survey, when around 14 central banks out of 57 said they were buying directly from domestic sources.

"One trend that we're seeing is that some central banks, especially in Africa, Latin America, are starting to buy gold directly from domestic, small-scale gold mines, which have really proliferated because of the higher price," said Shaokai Fan, global head of central Banks at WGC.

Central banks of Colombia, Tanzania, Ghana, Zambia, Mongolia and the Philippines are relying on domestically mined gold to build up reserves, according to the industry body.

Ghana Gold Board — the state agency managing gold purchases on behalf of the Bank of Ghana — in April secured agreements with several mining companies to buy 20% of their gold output, Reuters reported. Last September, Tanzania's mining authority reportedly mandated that all gold exporters, including miners and traders, put aside at least 20% of their output to sell to the central bank.

Gold prices since the start of the year

"You can make an argument that it's cheaper than buying gold on the international market, because a lot of these central banks buy gold at a slight discount to the international price," Fan said.

Traditionally, central banks acquire gold through the global over-the-counter market — typically centered in London — where gold is transacted via major bullion banks, priced in U.S. dollars, euros, or sterling. These purchases often involve high-purity London Good Delivery or LGD bars, which meet global trading standards and are stored in top-tier vaults such as those at the Bank of England.

Because of gold's soaring prices and its attractiveness as a hedge against geopolitical risks, it is natural that the central banks of producer nations would turn to domestic output, said Adrian Ash, director of research at gold investment firm BullionVault.

Gold prices have been on a tear, scaling fresh highs amid geopolitical uncertainties and waning confidence in other traditional safe havens. Spot gold prices are currently trading at $3,328.3 per ounce, up almost 27% year to date, data from LSEG showed. Buying domestic mine output saves on banking and intermediary fees, as well as shipping costs.

However, countries need to pay for processing and refining the metal to LGD standard — the de facto international benchmark for large gold bullion. These processes need to be done overseas if the country doesn't have domestic LGD refining, which will add costs, Ash said.

Central banks that buy gold bars from local mines and have domestic LGD refining capacity, nullify those additional costs. The Philippines' central bank, for instance, is a certified LGD refiner. Kazakhstan has two refiners accredited by the London Bullion Market Association. Russia had seven until they were suspended in 2022 after the country invaded Ukraine. Others such as Ghana and Zambia might need to rely on external refiners, offsetting part of the upfront savings.

Another compelling driver for buying domestic gold is monetary flexibility. 

Purchasing gold through the international market often requires dollars — a reserve asset. That means central banks must swap one reserve for another. But that won't be the case if they use local currencies to buy gold from their own backyard.

"You're able to grow your reserves using local currency and therefore not sacrifice another reserve asset to grow your gold reserves," said WGC's Fan.

With rising global debt levels, trade and geopolitical risks on the cards, central banks want to strengthen their reserve buffers to shield against sudden financial shocks. Holding more reserves — in multiple forms — provides ammunition to manage potential crises.

Out of the 73 central banks surveyed by the WGC, around 95% said they expect peers across the world to raise gold reserves over the next year.

In the past, if these central banks wanted to buy gold, they would probably just purchase it on the international market, Fan explained. "But if you have local gold production in your country, a lot of central banks are thinking, well, maybe we can use this local gold production instead and add the reserves this way," he added. 

Providing support for domestic mining sectors and respective local communities are also key drivers for central banks purchases via local mines. Demand for gold in some countries is too small, and central banks are incentivized to support mining operations in the country, which in turn generates jobs, said Nicky Shiels, head of research and metals strategy at MKS PAMP.

Shiels, however, noted that purchasing gold via local mines comes with risks.  

Central bank purchases through international markets often via leading bullion banks offer greater trust and minimize reputational risks for central banks, she said. Much of the gold being bought domestically comes from artisanal and small-scale gold mining — ASGM has been linked with poor labor practices, environmental damage, and illegal smuggling. 

But it can also be argued that central banks, with their institutional credibility and financial weight, are in a good position to formalize and clean up that supply chain, said WGC's Fan.

"Central banks can harness their massive buying power to do good for these artisanal, small scale miners," he said.

"Having a credible, large-scale buyer like the central bank gives small-scale miners a legal and fair outlet to sell their gold," said Fan. "That not only diverts flows away from criminal networks but also improves traceability and accountability."

"That's exactly how we describe it as — a win-win."