Central bank demand continues to dominate the gold market and could be a key factor explaining why the precious metal continues to hold key long-term support levels in the face of rising bond yields and persistent US dollar strength.
China continues to dominate the gold market
The World Gold Council (WGC) has just released a report on central banks' gold purchases. Accordingly, central banks bought 77 tons of gold in August, up 38% compared to the amount purchased in July.
The WGC noted that central banks bought 219 tonnes of gold in the past three months. Analysts said central bank demand is on track to see healthy demand this year.
“The recent buying suggests that gold has overcome the net selling seen in April and May,” Krishan Gopaul, senior analyst at the WGC, said in the report.
Gold prices have fallen sharply in recent times and "broke" the $1,900/ounce mark as the USD increased very strongly. But in reality, this precious metal could have been "overthrown" if it weren't for this factor. Illustration photo
“Therefore, we believe that the long-term trend of healthy central bank demand remains intact,” Krishan Gopaul said optimistically.
However, while demand remains strong, Gopaul noted that purchases are limited to a handful of central banks. China continues to dominate the market after buying 29 tonnes of gold in August.
Since the start of the gold buying spree last November, the People's Bank of China has increased its gold reserves by 217 tonnes to a total of 2,165 tonnes, accounting for just over 4% of its total foreign exchange reserves.
The Polish National Bank also remains a significant buyer after buying 18 tonnes of gold in August. Gopaul said the Polish national bank has bought 88 tonnes of gold so far this year and is aiming to reach its announced 100-tonne target in 2021.
Gopaul noted that Poland's gold reserves at 314 tonnes currently account for 11% of its total foreign exchange reserves.
Another central bank the WGC is watching closely is Türkiye, which bought 15 tonnes of gold in August. The central bank continues to rebuild its reserves after a significant sell-off in April and May.
Other central bank buyers included Uzbekistan, which increased its gold reserves to 9 tonnes, the Reserve Bank of India, the Czech National Bank and the Monetary Authority of Singapore, which each bought 2 tonnes of the precious metal in August, and the National Bank of the Kyrgyz Republic, which bought 1 tonne.
The WGC said there were no notable gold sellers last month. However, Gopaul said it was looking into reports that the Central Bank of Bolivia “monetized” its 17 tons of gold reserves, according to a Bloomberg report.
“If confirmed, this would represent a 40% decline in the country’s gold reserves (by weight). However, until confirmed, there is still ambiguity about the use of “monetization.” Currently, data on gold reserves at the Central Bank of Bolivia is not available after April, so we are waiting for more information,” Gopaul said.
Central banks support gold prices
The WGC sees central bank gold demand as a key pillar supporting the precious metals market, which has seen lackluster investment demand for most of 2023.
Analysts note that rising bond yields have created a challenging environment for precious metals as they increase the opportunity cost of holding a non-yielding asset.
The headwinds have been felt acutely in recent weeks, with the 10-year yield rising to a 16-year high and now above 4.7%. This week, the 30-year yield rose to 5% for the first time since 2007, sending gold prices tumbling below $1,900 an ounce.
Investment demand for the world's largest gold-backed exchange-traded product (NYSE: GLD) also fell to its lowest level since August 2019 as investors fled the market.
Gold futures for December delivery are currently testing a key support level at $1,830 an ounce. Analysts say a break of this level could see prices fall to $1,800 an ounce.
Although gold has been under heavy selling pressure, analysts note that gold prices are quite resilient when it comes to bond yields. In a recent interview with Kitco News, Colin Cieszynski, chief market strategist at SIA Wealth Management, said that gold prices will stay below $1,800 in the current environment.
James Robertson, an analyst at Grant's Interest Rate Observer, said central bank demand has completely transformed the gold market. He added that he expects central banks to continue buying gold as countries diversify away from the US dollar.
“Gold is the only way that central banks in emerging markets can help themselves escape the currency chaos caused by the US dollar,” he said.
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