Central bank demand for gold has surged in the past five years, swallowing nearly one in every 10 ounces produced by the mining sector on official data and running at perhaps twice that size on the gold industry’s best estimates for purchases including unreported allocations.
That total would equate to almost 60% of the massive private-investment demand seen since summer 2019, and it would very nearly match net consumer demand for jewellery and from technology use over the period.
Central bank appetite for gold seems relentless
Driven by geopolitics as much as by investment strategy, the seemingly relentless appetite for gold among central banks has become ever-more important to gold’s underlying bull run, both in terms of the fundamentals and for wider market sentiment. But as the heavy European gold sales of the 1990s show, central bank action in gold can and will change.
This summer already, central-bank gold action isn’t quite a one-way street anymore. After surging since the global financial crisis on de-dollarization and diversification by emerging markets led by Russia, China and India, official sector demand is showing signs of caution and more dynamic trading as prices set fresh record highs.
While India has continued to add to its central bank gold reserves every month during 2024’s run of new record prices so far, China has paused its accumulation for three months running, at least on the official data. Only the People’s Bank knows whether it baulked at paying the latest record high prices for gold, or whether it wants to signal caution to Chinese households after the frenzy of private-sector demand seen earlier this year.
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Singapore, the fourth largest buyer of the past three years, took profit in June, selling almost all of the gold it had acquired over the previous 12 months.
Long-term, worsening trade tensions, monetary politics and geopolitical violence make the bid for gold from sovereign nations look secure. Shorter term, more dynamic trading could become a feature if reserve managers follow private investors across the West in taking a profit on at least a portion of their holdings.
Family offices are also buying gold
Another big driver in the gold price has been appetite from wealthy families worried about levels of US government debt. World Gold Council data has indicated that so-called opaque purchases of gold have surged to record levels this summer (WGC started tracking this part of the market in 2000).
Investors are also acutely aware that interest rate cuts are going to reduce yields on government bonds, again increasing gold’s attractiveness as an alternative to low risk debt. US family offices seem to be a big source of gold buying in Q2, and there is nothing to suggest this trend is going to reverse, especially as the Federal Reserve is inching towards its first rate cut.
The Congressional Budget Office, which keeps tabs on US government spending, has already projected that if Donald Trump wins the election in November, his current spending plans will see US debt levels surpass its highs in WW2, when measured as a proportion of GDP.
Analysts say that over the counter purchases are becoming an increasingly important factor in the gold market. The transactions are hard to track, but will include investments being made to hedge existing positions in the futures market.
