Despite the recent surge in gold prices, demand remains hot.
According to the World Gold Council, the demand for gold from central banks increased sharply in the first quarter of this year, with global central bank gold reserves increasing by 228 tons. Since 2022, the world’s “central mothers” are buying gold, what are the reasons behind? And what are the reasons for this?
Many central banks are buying gold in a big way
Since last year, many countries’ central banks have increased their gold reserves. Data from the World Gold Council shows that central bank gold purchases got off to a hot start this year, with demand for gold reaching 228 tons in the first quarter. Although the figure is lower than the previous two quarters, this has been the strongest first quarter of demand on record.
Among them, the Financial Supervisory Authority of Singapore was the largest buyer among global central banks in the first quarter, purchasing 69 tons of new gold; China’s central bank purchased 58 tons of gold reserves, becoming the second largest buyer in the first quarter.
Turkey and India ranked third and fourth with 30 tons and 7 tons of additional gold holdings, respectively. In addition, the Czech Republic with an increase of 2 tons and the Philippines with an increase of 1 ton were also noteworthy buyers.
The pace of gold sales by central banks has been much more moderate than the strong buying momentum. Year-to-date, net gold purchases by central banks have far exceeded sales.
What are the considerations behind it? Why are central banks around the world eager to buy gold? It has to do with several characteristics of gold.
One of them is the risk-averse property.
With the world economy slowing down and the risk of financial turmoil continuing to fester, gold is favored as a traditional safe-haven asset. “Looking back in history, gold investments have delivered positive returns in five of the last seven recessions.” said Louise Street, senior market analyst at the World Gold Council.
BOC International Securities Global Chief Economist Guan Tao analysis, into 2023, with the Fed rate hikes gradually near the end, coupled with the continued fermentation of the banking sector turmoil in Europe and the United States, the market risk aversion, gold prices on the rise, year-to-date London gold is now up by more than 11%.
Second, anti-inflationary properties. During periods of high global inflation, gold assets tend to perform outstandingly. Guantao said, for example, the global average inflation level was 15% between 1974 and 1984, and the average yield of London gold spot was 25.4%. In times of global hyperinflation, gold assets are naturally more popular.
Third, the security properties. Geopolitical risks rise, the security of gold reserves highlighted. After the outbreak of the crisis in Ukraine, the main reserve currency issuing countries increasingly weaponize their currencies and abuse economic and financial sanctions, shaking the credit foundation of the current international monetary system. Guantao believes that the current increase in gold reserves by the central banks of many countries will help promote the diversification of international reserve assets and prevent the risk of sanctions in future geopolitical games.
Gold prices entering an upward trend? Looking ahead, will gold investment demand continue to rise? How will the price of gold change, and is it too late to follow and buy gold? In this scenario, investment demand for gold is likely to increase this year. Central bank gold purchases are also likely to remain strong, and even though they may be lower than last year’s record highs, they are still likely to be the cornerstone of gold demand throughout 2023. Meanwhile, several institutions have also raised their forecasts for gold prices. CICC said that with the fall in U.S. inflation, overlaid with the current counter-globalization backdrop, the demand for gold reserves purchases is systematically rising and gold prices have entered the right-hand upward channel and are expected to reach the $2,300 to $2,500/oz level.
In the early hours of May 4, Beijing time, the Federal Reserve raised interest rates again by 25 basis points. However, considering the recent rebound in economic data, the crisis of several banks and the problem of the U.S. federal debt ceiling, etc., the suspension of interest rate hikes is still the general trend.
Lu Liting, an analyst at Dongguan Securities, said that before the Federal Reserve officially stops raising interest rates, gold still has allocation value. In addition, at a time of greater uncertainty in global economic development, as a stable safe-haven value preservation tool, gold’s physical investment demand and central bank buying will continue to increase. China Post Securities analyst Li Shuaihua believes that the Fed is expected to suspend interest rate hikes in June, the marginal relaxation of liquidity, gold prices upward pressure has been released; at the same time the recession is expected to continue to heat up, gold configuration value highlights, gold prices are expected to break through $ 2600 / ounce.
