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Category: Bullion Bulletin

Bullion Bulletin: Central banks step up gold buys

The latest Gold Demand Trends from the World Gold Council (WGC), covering the third quarter of 2022, reports that demand was 28% higher year-on-year a...

13 November 2022

Gary Mead

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The latest Gold Demand Trends from the World Gold Council (WGC), covering the third quarter of 2022, reports that demand was 28% higher year-on-year and totalled 1,181 tonnes. Demand so far this year is 18% higher than the same period in 2021 and is back to pre-pandemic levels.

This increase in demand begs one question: if demand is so much higher then why is the gold price 7% down since the start of the year? But that’s the price in US Dollars. If we consider the Pound Sterling gold price, that’s up by 8%. If we price gold in Japanese Yen, then this price has risen by more than 16% since the start of 2022. The discrepancy is simple. Like most commodities the generally used reference price for gold is the US Dollar, and so far this year the Dollar has been exceptionally strong – against other currencies it’s gained in value by some 20%. And the reason for the Dollar’s strength is that investors have seen US interest rates go higher, and they don’t like what they see of the prospects for the global economy. In times of crisis – a word that has come into its own recently – investors flock to what they imagine is the least worst, most liquid asset available, one that has strong government backing – and that has long been US treasury bills. These bills, because they are backed by the US government, are seen as riskless.

That suggestion seems to be borne out by the latest Gold Demand Trends, which says that investment demand for gold was 47% down year-on-year, at 124 tonnes.

But it’s the huge increase in gold buying by central banks, which reached a quarterly record of 399 tonnes, almost double the previous record, which is on the surface puzzling. Only a quarter of those tonnes went to publicly identifiable institutions; there were some “mystery buyers” said Bloomberg. Most central banks inform the International Monetary Fund (IMF) about their gold transactions, but this is a convention, not a requirement.

There are a variety of ‘suspects’ who might have an interest and the wealth to buy such a weight of gold. Russia has been largely excluded from the international payments system since its invasion of Ukraine and it is clearly interested in toppling the Dollar as the international reserve currency, as is China, which is thought to have vast gold reserves. Russia has also profited hugely from the tremendous rise in crude oil and gas prices. So it has the means and the motive to buy gold as a bulwark against uncertainty.

The US Dollar price for gold is unlikely to improve rapidly or soon, so long as the US Federal Reserve remains in the mood to push interest rates higher. With inflation nudging 9%/year it will continue doing so. The Swiss bank UBS has sent a note to clients this week asserting that the gold price will rise by 13% by winter 2023, largely as a consequence of an assumed cut in interest rates by almost 2%. UBS says “we think gold should benefit [from the Fed’s interest rate cut] and therefore holding long positions in gold will offer an attractive risk-reward as the tightening cycle comes to an end”. A cut in US rates will weaken the Dollar – and that will strengthen the US Dollar gold price.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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