Gold held at the Bank of England is trading at an unusually low price

Bank of England gold is trading at a rare discount, a sign that central banks could lose some of their holdings.

The Bank of England vaults hold 5,676 tons of bullion, one of the largest holdings in the world, which it holds on behalf of other central and commercial banks. Gold held by central banks is usually bought and sold between large institutions in bilateral transactions at prices usually within a few cents of the market rate.

In recent days, however, gold at the Bank of England has traded a dollar an ounce below benchmark London prices, according to traders familiar with the matter. Such a large discount usually indicates a large institution, such as a central bank, that is selling a significant amount of reserves to raise US dollars or other currencies, one trader said.

Central banks have increased their holdings of gold by nearly 456 tons in 2021, in line with a longstanding trend as emerging markets diversify their reserves away from foreign exchange, according to the latest data from the World Gold Council. Notable buyers included Brazil, Thailand and Ireland, who made their first purchase since 2009.

Buying could slow through 2022 as financial institutions look to hold on to more interest dollars as the Federal Reserve prepares for aggressive monetary tightening. The US dollar is on track for its biggest annual gain in seven years, putting pressure on emerging market currencies and borrowing costs.

The Bank of England's discount on gold has narrowed against margins in dollars an ounce but remains high by usual standards, people who asked not to be named in a private discussion said. Bullion has fallen more than 12% since its peak in March, leaving it almost flat this year.