Gold hits another all-time high as investors take cues from near-record buying by central banks

By Myra P. Saefong

Traders may be trying to 'front-run outsized central-bank purchases later this year,' analyst says

With gold prices settling at a record high for a 13th time this year on Friday, the metal's strength as a safe-haven investment isn't just being fueled by expectations for Federal Reserve interest-rate cuts or geopolitical tensions - purchases by central banks have been a significant factor, too.

"The surge in gold prices to unprecedented levels has captured the attention of investors worldwide," said Nigel Green, chief executive officer at deVere Group.

Gold for June delivery (GC00) (GCM24) settled at $2,345.40 an ounce Friday on Comex, marking yet another record settlement high this year based on the most-active contract. It traded as high as $2,350 during the session, an all-time intraday record high.

The "common narrative attributes this surge to geopolitical tensions and expectations of interest-rate cuts by the U.S. Federal Reserve," Green said in emailed commentary. It's certainly true that the Russia-Ukraine war and conflicts in the Middle East have contributed to the uncertainty plaguing global markets, he noted, and investors traditionally flock to gold during times of geopolitical turmoil - perceiving it as a "safe-haven asset that retains value even in turbulent times."

Rate cuts by the Fed, meanwhile, diminish the opportunity cost of holding gold, and that further entices investors to enter the market, he said.

Central-bank demand

Demand for gold from central banks, meanwhile, has been notably strong over the last couple of years.

Central banks have been among the "tide lifting the floor/base price of gold," said Paul Wong, market strategist at Sprott Asset Management.

Overall, gold demand from central banks totaled 1,037.4 metric tons in 2023, just below the record high set in 2022 at 1,081.9 metric tons, according to the World Gold Council.

Gold demand among central banks has been at more than 1,000 metric tons for the last two years.

Overall, central-bank buying of gold tends to be "tidal" with periods of five to 10 years, said Ross Norman, chief executive officer at precious-metals market information provider Metals Daily Ltd. - adding that he expects official buying to "remain firm and likely to hold above 1,000 tonnes per annum."

"De-dollarization is reportedly an ongoing theme or concern as the West increase sanctions, the U.S. weaponizes the dollar and access to its payments gateways are curtailed," Norman he told MarketWatch. In turn, the BRICS group of emerging economies - Brazil Russia, India, China and South Africa - and other developing countries may be "nervous and shifting reserves into gold to balance the risk," he added.

Central banks have been consistent net buyers of gold on an annual basis since 2010 - accumulating over 7,800 metric tons over that time, with more than a quarter of that purchased in the last two years, according to the World Gold Council.

Nicholas Colas, co-founder of DataTrek Research, said in a note Thursday that his company's positive view on gold stems from the belief that foreign central banks will be "consistent buyers for many years," even as the pace of purchases has been slowing so far in 2024.

He said that one reasonable explanation for the recent pop in gold prices is that "traders are trying to front-run outsized central-bank purchases later this year."

'Traders are trying to front-run outsized central-bank purchases later this year.'Nicholas Colas, DataTrek

Rising geopolitical tensions make "incremental central-bank gold reserves more valuable to many countries than just a few months ago," Colas noted.

Ever since Western sanctions against Russia in the wake of its 2022 invasion of Ukraine, "the value of holding gold reserves rather than Treasurys has become more obvious to many governments," he explained. "Both assets are priced in dollars, highly liquid and respected as a long-term store of value."

Physical gold, however, "cannot be confiscated or subjected to sanctions once it is housed in a local vault," Colas said.

In February, global central-bank purchases of gold rose by 19 metric tons, up for a ninth consecutive month, per data from the the World Gold Council.

A combination of slower gross purchases and a higher volume of sales led to a 58% decline from January's total of 45 metric tons. China's central bank was February's biggest buyer, with the nation's gold reserves climbing for 16th month in a row, data showed.

This diversification of central-bank holdings "not only safeguards against current volatility but also reflects China's broader ambition to asset economic independence and influence in the global financial landscape," said deVere Group's Green.

China takes the lead

China has been the largest buyer among central banks, lifting its total gold reserves by 225 metric tons last year - making 2023 the country's highest single year of reported additions since at least 1977, the World Gold Council said.

The average Chinese investor has approximately 75% of their net worth tied to fragile real estate, said Sprott's Wong. The country's bond market is "poorly developed, their equity market has gone nowhere in 20 years, cryptocurrencies are banned and there are capital controls," among other issues, he said. That leaves gold as a "known, historically well-accepted store of value."

Wong also said that there's a desire or need to "diversify away from U.S. dollar reserve assets," of which gold is likely by far the largest, given China's "worsening relationship with the U.S. and the West in general."

"Unless global peace breaks out and everyone decides to re-enter a U.S.-centric reglobalization drive, central banks ... would likely continue to move away from U.S. dollar reserves," he said.

There is a "rising floor for the price of gold with what is essentially a 'central bank put,'" akin to the U.S. Fed's put on the bond and equity market, said Wong.

For a Chinese economy facing high retail savings, a "stock market in freefall and unrealized property-sector losses, gold represents one of the few surefire and dependable investments - and they know it," said Metals Daily's Norman.

-Myra P. Saefong

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04-05-24 1557ET

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