Azerbaijan State Oil Fund diversifies assets Betting on gold

The past year witnessed an unprecedented surge in gold prices, with the "yellow metal" reaching historic highs and increasing in value by more than 25% year-on-year. This rise was fueled by significant purchases from financial regulators and growing demand from private investors and banks. While there has been a slight slowdown in price dynamics at the beginning of this year, the "gold rush" has continued from January to March, driven by the increased diversification efforts of central banks and sovereign wealth funds around the world.

A similar trend is emerging in Azerbaijan, where the State Oil Fund (SOFAZ) is accelerating its strategy to increase the share of gold in its reserves.

According to the 2024 Gold Demand Trends report and recent studies by the World Gold Council (WGC), global demand for gold reached record levels in 2024, driven largely by substantial purchases from central banks and a dramatic rise in investor demand. A major factor behind this surge in gold interest has been its reputation as a safe-haven asset, particularly in light of the ongoing war in Ukraine and escalating tensions in the Middle East.

Experts point to key economic influences on the precious metals market, particularly the beginning of a monetary easing cycle by the U.S. Federal Reserve (Fed) and other global financial regulators, who signaled a move towards interest rate cuts. Since gold prices typically move inversely to the value of the U.S. dollar, an increase in the supply of global currencies and a decline in the value of treasury bonds typically lead to a surge in demand for gold.

Additionally, with the return of Donald Trump to the White House, a new phase of the U.S.-China trade war emerged, marked by the imposition of reciprocal tariffs. This geopolitical development further fueled demand for precious metals, propelling gold prices to new heights.

Overall, according to Bloomberg, gold prices increased by 2.7% year-on-year in 2024. The "bullish" trend continued into the current year, with the price of a troy ounce of gold reaching a new record of $2930 as of March 7, 2025. This trend is supported by broader expectations that a "softer" U.S. labor market may strengthen the U.S. Federal Reserve's arguments for further monetary easing, which would lead to a weakening of the dollar and positively impact gold.

Experts from the World Gold Council (WGC) predict that in 2025, demand for gold will remain robust, driven by central banks and investors in gold exchange-traded funds (ETFs), particularly if regulators continue to lower refinancing rates. Central banks around the world have been steadily increasing their gold reserves and other "eternal" assets amid growing risks, especially concerns over potential destabilization of currency reserves due to the rise of cryptocurrencies.

Similarly, private investors and commercial banks, looking to hedge against risks, have turned to gold as a safe-haven asset. WGC data reveals that leading central banks maintained their gold-buying momentum in 2024, with annual purchases reaching 1,045 tons, marking the third consecutive year that purchases surpassed 1,000 tons. According to Bank of America experts, by the end of last year, physical gold reserves made up 10% of total bank reserves, up from just 3% a decade ago.

Looking ahead, it is expected that the share of gold in the reserves of global central banks and sovereign wealth funds will soon surpass that of the euro, placing it second only to the U.S. dollar in global reserves.

"Central banks continued their strong interest for gold in January with reported net purchases of 18t. The sustained buying highlights the strategic importance of gold in official reserves, particularly as central banks navigate heightened geopolitical risks," recently noted WGC analyst Marissa Salim. Central banks in Asian countries remain the most active buyers of gold. In January, the top three were Uzbekistan (8.1 tons), China (5 tons), and Kazakhstan (3.8 tons), followed by India (2.8 tons) and Qatar (1.3 tons). Regulators in Poland (3.1 tons), the Czech Republic (1.7 tons), and others also continue to increase their gold reserves.

These global trends are also reflected in Azerbaijan, where the State Oil Fund of Azerbaijan (SOFAZ), the country’s main reserve structure, is progressively increasing its gold reserves as part of its updated investment strategy. In response to the growing risks to its investment portfolio caused by negative global financial market trends, SOFAZ raised its gold share from 13.1% to 13.9% of total assets as early as 2022. By the start of 2023, the Fund had accumulated around 101.8 tons of gold.

Investing in gold allows SOFAZ to hedge against risks such as currency depreciation and securities price declines. Moreover, the returns on gold increase during periods of crisis, when other investments typically underperform, and during times of high inflation and monetary easing. Traditionally, SOFAZ follows a cautious and balanced investment policy, and approximately 70% of its bond and money market portfolio is allocated to the most reliable AAA-rated instruments.

Until recently, two-thirds of SOFAZ’s assets were invested in bonds and other government securities, followed by stocks, commercial real estate, and, more recently, gold.

These processes have only accelerated in the subsequent period. "Starting in 2025, the structure of the State Oil Fund's investment portfolio has been changed," said Toghrul Rahimbayli, Head of the Asset Allocation, Risk Management, and Profitability Department of SOFAZ, during the recent event SOFAZ Media Dialogue: Investment Results of 2024 and Prospects for 2025. "According to these changes in the Fund's investment portfolio structure, the share of investments in bonds has been reduced by 10 percentage points (p.p.) to 40%, while the share of investments in stocks has increased by 3 p.p. to 25%, in real estate by 3 p.p. to 10%, and the share of gold will reach 25%, an increase of 4 p.p."

It appears that in the current year, the State Oil Fund will continue the process of diversifying its asset structure, increasing the share of the main precious metal. "The total amount of gold in SOFAZ's assets will increase to 170 tons by April-May 2025," said Farhad Zeynalov, Director of SOFAZ's Investment Department, during a briefing on March 6. "The share of gold in the investment portfolio is planned to reach 25%." 

According to the department head, the fund acquired 44.8 tons of gold last year, of which 41 tons have already been delivered to the country. As of December 31, 2024, the total volume of gold in the fund's assets amounted to 146.6 tons (20.6% of the investment portfolio), worth $12.4 billion. The department head also reminded that the price of gold in 2024 increased by 27.2%, from $2063 to $2624.5 per troy ounce, and taking into account the period from the beginning of 2024 to March 2025, the total increase was 40%.

It is worth recalling that the prudent allocation of the State Oil Fund's asset structure serves as a reliable buffer in the event of force majeure situations on the global stock market, stock market crashes, and contributes to the preservation of foreign exchange reserves and the stability of the monetary and credit system of the country. At the same time, the accumulation of significant volumes of liquid and protected assets by the fund ensures high international ratings for SOFAZ, forming the basis for a positive country assessment by international rating agencies.