Quick Bites | Central banks join gold buying spree

Gold is having its moment, last week reaching a new record high of USD 2,425 per troy ounce (t.oz) before profit-taking set in. Geopolitical hedging from global central banks could keep it shining. Gold got a short-term boost following the death of Iran’s president, for example, but it has been on the rise over the past 2 years, up 33% since the end of 2022.

Gold 5 year chart

Source: Trading Economics

The rally in gold has defied some typical headwinds. Prices have surged even though real interest rates have risen: gold typically moves in the opposite direction to real yields since it does not generate any income and higher real rates make it less attractive to hold.

But central banks have been major supporters of the precious metal. Central banks have added around 2,200 tons of gold to their reserves since the third quarter of 2022, according to the World Gold Council, an increase of nearly $170 billion at current prices. Central bank net purchases now account for more than a fifth of global gold demand or about twice the proportion between 2012 and 2021. 

Western sanctions on Russia, after it invaded Ukraine in 2022, most likely prompted some central banks to diversify away from USD-based assets. Russia’s roughly $300 billion in international reserves were frozen and there has been talk of using the income on them to help rebuild Ukraine. Featuring prominently in Russia’s reserves before and especially after the invasion: gold, which is easy to stockpile beyond foreigners’ reach.

Source: Wall Street Journal

Most gold buying from central banks is not reported, but analysts think that China, India and Turkey have driven a lot of buying in the last year or two. 

China’s central bank has been buying gold for 18 straight months since November 2022, boosting its gold reserves by 16%, or 10 million t.oz. China increasing its exposure to gold could move the market quite significantly. Gold was approaching 5% of China’s total reserves as of April 2024 – a rise from around 3% in 2022. If China allocates just 1% more of its reserves into gold, that would be equal to around 9% of total global supply last year, using current prices.