Central banks buying gold at 'extraordinary levels' as price nudges ATH

Central banks continue to grow their gold reserves, adding 228t in the March quarter
The past five quarters have seen “extraordinary levels” of central bank gold buying, the World Gold Council says
Came as gold prices threatened record highs

Central banks anxious about a rising tide of geopolitical risk are buying gold at “extraordinary levels”, with the World Gold Council declaring the March quarter this year the best in a decade for central bank purchases.

As fears around a growing banking crisis emerged in March, and safe haven buying sent gold prices in the direction of US$2000/oz, national reserves added around 228t of bullion, equivalent to around two-thirds of Australia’s annual gold production and 34% higher than the previous record in 2013.

It followed a record 2022, when central banks added 1078t to their reserves.

The World Gold Council’s Q1 Gold Demand Trends Report shows total gold demand outside of over the counter markets was 13% lower in first quarter year on year off a very high base at 1081t.

But including the OTC market (transactions between market participants outside of centralised exchanges), gold demand grew 1% to 1174t.

China added 58t to its reserves, but it was the Monetary Authority of Singapore that presented as the world’s biggest buyer, picking up 69t and lifting its total holdings by 45% since the end of 2022.

“Central banks have been net buyers now for about 13 or 14 years, so they’ve been active in the market,” WGC head of Asia-Pacific and director of central banks Shaokai Fan said.

“But certainly the levels we’ve been seeing in the last five quarters now is extraordinary.

“Q1 is a continuation of the strong buying we saw last year, especially versus the last half of the second half of last year.”

What is driving central bank buying?

Fan said the WGC was the busiest it had ever been in terms of fielding inquiries on the commodity.

Geopolitical risks and sanctions against Russia have livened up central banks to the importance of maintaining gold holdings, Fan said.

“When sanctions were announced against the Bank of Russia last year, it was really the first time that a major large central bank was sanctioned in this way,” he said.

“And I think it made many central bank reserve managers around the world consider how to calculate political risk. How has political risk changed? And then how can you mitigate this new type of political risk?

“I think that the overall environment for risk, and specifically geopolitical risk is definitely something that is underscoring the need for gold among central banks.”

US investors pile into bars and coins

Retail investors are also getting antsy about the tenuous economic outlook.

Bar and coin investment in inflation-riddled Turkey (50% on still underestimated official figures) hit 50t for the first time ever.

In the US, bar and coin demand rose 40% quarter on quarter and 4% year on year to 32t, the fourth strongest quarter since 2010 and double the five year average.

“On the retail side, we’ve seen very strong bar and coin demand from the US, but a little bit of bar and coin demand coming off from Europe,” Fan said.

“I think the US bar and coin story is again a reflection of concerns about the banking system in the US with now three regional bank failures. And others may be in the wings as well.”

Globally, bar and coin investment hit 300t for the third consecutive quarter, the first time that’s happened since 2013.

At the same time high gold prices are a threat to consumer demand. They hurt jewellery demand in India, falling 17% YoY to 78t as the Rupee gold price hit a record high.

Recession fears hurt US jewellery purchases, though they remain healthy in comparison to long-term levels.

But China’s re-emergence from Covid saw jewellery demand there rise to 198t, 41% of the total, helping maintain unchanged YoY jewellery demand worldwide of 478t.

That was steady against 2022 levels but down 24% quarter on quarter thanks to seasonal effects.

Fan says it will be “interesting to see” whether China’s revival is a one quarter phenomenon or whether its stronger GDP growth spurs elevated consumer demand across 2023.

The return of the ETF?

On a quarterly basis, ETF holdings and investment demand remain a drag on the gold market.

Investment demand lifted 9% on the previous quarter, but was down 51% year on year.

ETF holdings slid 29t in Q1 (around US$1.5b worth) but outflows in January and February swung to inflows in March, a sign of much stronger sentiment as net longs on the COMEX ended at 622t, a 10-month high but below the average levels seen in 2021 (654t) and 2020 (872t). The latter happens to be the year gold hit a record US$2075/oz.

The March lift in ETF holdings was the first in 11 months, a trend that has held firm into April.

“I think that as long as we have this unresolved banking crisis hanging over our heads, that’s definitely a catalyst for more interest in looking for protection in portfolios,” Fan said.

“So that’ll be a major factor going forward. Also, if we move into recession, then traditionally speaking, gold has done better during recessionary periods.

“So that might be another catalyst as well for investors to seek ways to change their portfolios around if we move into that different macroeconomic environment.”

A stronger than expected US jobs report, which showed a non-farm payroll lift of 253,000 against a consensus forecast of 180,000, saw gold prices fall in afternoon trade on Friday, with LBMA prices dropping from US$2039/oz in the AM to US$2001/oz.

That halted a run towards all time highs. But the ambiance for strong gold prices remains.

A more dovish stance from the US Fed in particular is helping matters. Some economists think last week’s 25bps rate hike may be the last of the current cycle.

“The issues we’re seeing in the banking sector, specifically in the United States (means) investors are seeking safe haven assets as a result of taking refuge from the fallout from banking crisis in the US,” Fan said.

“And as a knock on effect, the potential pivot to a much more dovish stance by central banks in terms of their monetary policy, I think that’s removed a headwind for gold, and has reduced the holding cost for gold and therefore has put some spunk back into the gold price.”