Gold rush
In recent years, gold fever has broken out globally with central banks (CBs) of various countries as buyers. This also represents the demand of the upper class.
In early May 2023, the world gold price skyrocketed to above the threshold of 2,050 USD/ounce, a historic high.
According to the World Gold Council (WGC), the gold market continues to receive strong support from central banks around the world. Many countries have continued to increase their gold reserves in the first months of 2023.
China continues to be the largest buyer of gold since the beginning of the year. In April, the People's Bank of China (PBOC) bought a net 8.1 tons of gold. This is the sixth consecutive month of net buying. China's total net gold purchase was more than 64 tons, bringing the country's gold reserves to 2,076 tons.
In the first quarter of 2023, central banks bought a net 228 tonnes of gold, a record high. In 2022, the group bought 1,078 tonnes of gold, the highest annual gold purchase since 1950 and more than double the 450 tonnes in 2021.
Global central bank demand for gold is likely to remain strong even after record purchases in 2022, according to Swiss bank UBS. They are estimated to buy about 700 tonnes of gold this year, down from 2022 but still above the average of 500 tonnes since 2010.
Gold continues to be chosen as a safe haven amid the global de-dollarization trend, high inflation and geopolitical instability in many places.
The global gold rush is being reflected in the actions of central banks in emerging markets, and has been going on for several years.
In fact, gold has long been considered a safe haven during times of global instability. This has been further confirmed by the outbreak of the Covid-19 pandemic, the Russia-Ukraine conflict, soaring global inflation, continued high debt levels, and an unstable global banking system.
In the US, inflation fell to 4.9% in April. But this is still very high, compared to the 2% target of the US Federal Reserve (Fed).
On the Financial Times, the CEO of a gold vault management company in London said that the elite are increasingly wary of the "new world order".
Recently, many countries have been wary of the greenback’s strength as the US debt has risen sharply. The West has punished Russia by freezing hundreds of billions of dollars in its foreign exchange reserves. Demand for gold has continued to increase.
Gold is expected to increase further.
UBS said that the trend of net central bank purchases is likely to continue amid rising geopolitical risks and rising inflation. The US decision to freeze Russia’s foreign exchange reserves following the Russia-Ukraine conflict could have a lasting impact on central bank behavior.
Previously, the USD was the main currency in the reserves of central banks of countries. However, new developments along with the soaring demand for gold are considered a sign of the de-dollarization process.
The biggest buyers of gold in recent times are mostly looking to replace the US dollar's dominance in global finance, including China and India.
Among the net buyers of gold are three members of the BRICS group of major emerging economies (Brazil, Russia, India, China and South Africa). More and more global trade transactions are being settled in Chinese yuan.
Some forecasters say gold could soon rise to a record $3,300 an ounce, similar to 1980 when inflation soared due to oil prices and unrest in the Middle East.
The recent instability of the world's banking system, including the US (with four collapses in the first few months of 2023), also contributed to the rapid increase in gold.
Saxo Bank representatives predict that tensions in the banking and financial markets will continue to increase as the US economy receives impacts from the Fed's strong monetary policies.
Gold is expected to continue to rise and reach a new record high in 2023 when the Fed ends its rate hike cycle and reverses to a lower one. A weak USD and still high inflation will support gold prices.
Some gold funds also believe that gold will enter a "new bull market" that will begin, with prices exceeding $2,100/ounce as early as 2023.
Accordingly, the current market conditions are very similar to the years 2001 and 2008. During those years, gold increased very strongly. In 2008, gold increased from 600 USD to 1,800 USD in a short period of time.
Gold has also been supported recently by the difficult negotiations to raise the US debt ceiling. The US government may face a cash crunch as early as August.
Negotiators warn that the final phase of negotiations on raising the debt ceiling could be the most sensitive and difficult for both parties in the US.
House Speaker Kevin McCarthy said on May 25 that no agreement had been reached on the debt ceiling. He said there had been back-and-forth with the White House but that reaching a deal was not easy.
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