Central banks are buying gold at the fastest rate in 55 years

Central banks around the world were last accumulating gold reserves at a breakneck pace 55 years ago, when the US dollar was still backed by gold. According to the World Gold Council (WGC), central banks bought a record 399 tonnes of gold worth around $20 billion in the third quarter of 2022 as global demand for the precious metal returned to levels of before the pandemic. Retail demand from jewelers and buyers of gold bars and coins was also strong, the WGC said in its latest quarterly report. WGC says global gold demand stood at 1,181 tonnes in the September quarter, good for 28% year-on-year growth.

WGC says among the biggest buyers were the central banks of Turkey, Uzbekistan, Qatar and India, although other central banks also bought a substantial amount of gold but did not report publicly. of their purchases. The Central Bank of Turkey remains the largest reported buyer of gold this year, adding 31 tonnes in the third quarter to bring its total gold reserves to 489 tonnes. The Central Bank of Uzbekistan purchased an additional 26 tons; the Central Bank of Qatar bought 15 tons; the Reserve Bank of India added 17 tonnes during the quarter, bringing its gold reserves to 785 tonnes.

Retail buyers of gold bars and coins also surged in Turkey to 46.8 tonnes in the quarter, up more than 300% year-on-year.

These developments are hardly surprising considering that gold is still considered the go-to safe asset in times of uncertainty or turmoil despite the emergence of cryptocurrencies like bitcoin. Gold is also considered an effective hedge against inflation, although experts say this only rings true over extended time frames measured in decades or even centuries.

Related: The real challenge for Europe’s energy market will come next year

Unfortunately, rising interest rates have spoiled the party for gold bulls, with exchange-traded funds (ETFs) storing bullion for investors becoming net sellers. Indeed, the shedding of bullion by ETFs countered central bank buying which pushed gold prices down 8% in the third quarter. Gold is a non-interest bearing asset and investors tend to shift their money to higher yielding instruments when interest rates rise. An overly strong dollar has also not helped gold (and commodity) prices. Gold prices are down 9.3% year-to-date and nearly 20% below their March high of $2,050 an ounce.

Spot gold price (USD per ounce)

Source: Business Insider

Long Term Bullish

Fortunately for gold bulls, gold’s long-term outlook appears to be trending higher. Markets are currently poised for the fourth consecutive 75 basis point hike, after which the Federal Reserve is expected to signal that it may scale back its rate hikes as early as December.

We think they are just walking to get to the end point. We think they are rising 75. We think they open the door for lower rate hikes from December. The November meeting is not really about November. It’s around December.” Michael Gapen, chief US economist at Bank of America, told CNBC. Gapen expects the Fed to raise interest rates by half a percentage point in December.

While inflation in the United States has remained stubbornly high, there are growing signs that high interest rates are starting to slow the economy with the housing market collapsing and some mortgage rates nearly doubling. . This calls for the Fed to take it easy in its aggressive hikes.

Gold traders seem to agree that gold’s long-term trajectory is up.

According to a gold industry survey, gold prices will rebound next year, despite higher interest rates. Traders expect prices to hit $1,830.50 an ounce by this time next year, nearly 11% above current levels.

I tend to think that the Fed’s aggressiveness is now largely “in the price”. That said, the possibility of a major near-term rebound in gold prices is very limited as rates climb and the US dollar remains strong, “Philip Klapwijk, managing director of Hong Kong-based consultant Precious Metals Insights Ltd, said in an email.

Finally, a weaker dollar is likely to improve the outlook for gold. The dollar could finally lose its luster after a long period of relative strength against other major currencies. The dollar index – a measure that pits the US dollar against six major currencies – recently fell to multi-month lows. According to Wells Fargo, the dollar’s surge is likely to continue this year as interest rates rise further, but the Fed’s rate cuts in 2023 should push the dollar into a “cyclical decline.” In other words, the dollar should fall in 2023 as the United States enters a recession and the Fed cuts rates.

By Alex Kimani for Oilprice.com

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