A scenario-based thinking tool for the gold price
There are two main reasons: reserve diversification and protection from sanctions. Foreign exchange reserves are essentially the bonds of other countries and can be frozen during a crisis. Gold, however, is not a debt instrument or a promise to pay; it carries no counterparty risk and cannot be canceled remotely. This is the reason behind the record purchases exceeding a thousand tons annually since 2022.
This institutional demand creates a strong floor for the price. The market has a massive, price-insensitive buyer. This is also the main reason gold held its value when interest rates spiked sharply between 2022 and 2024.
Although central bank purchases appear to be a small fraction of the total market volume, their impact is much larger than their size because they act as the "marginal buyer" setting the price.