The price of gold shines! Global central banks are pushing gold prices closer to

2024-08-01

Under the prospect of the Federal Reserve's interest rate cut and the backdrop of geopolitical risks, gold prices continued to strengthen on Monday, reaching a high of around $2,526.74 per ounce during the session, and ultimately closed at $2,517.82 per ounce, close to the recent record high. Last week, gold prices had set a historical high of $2,531.60 per ounce.

On Tuesday (August 27), during the midday trading session, gold futures once again surged, trading near $2,549.70 per ounce, approaching the historical high once more.

Compared to previous gold bull markets, central banks around the world have also become a major driving force behind this round of gold price increases. The National Bank of Poland purchased 19 tons of gold in the second quarter, becoming the largest central bank buyer of gold globally.

Global Central Banks' Boost

According to data from the World Gold Council (WGC), the net gold purchase by central banks worldwide in 2023 reached 1,037 tons, marking the second consecutive year of increasing reserves by over 1,000 tons. In 2022, the total gold purchase by global central banks was even higher at 1,136 tons, recording the highest level since 1950. In the first half of this year, central banks continued to net increase their gold purchases by 483 tons, which is a 5% increase compared to the record level of 460 tons in the first half of 2023. Joe Cavatoni, Senior Market Strategist at WGC, stated that the gold purchase volume by global central banks in the second quarter was 3% higher than the five-year quarterly average, "still a very healthy level of purchasing, continuing the long-term positive demand trend for gold."

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Adrian Ash, Head of Research at Bullion Vault, the world's largest online gold investment platform, emphasized in a comment this week: "Over the past five years, the demand for gold by global central banks has surged. According to official data, for every 10 ounces of newly mined gold, 1 ounce is purchased by global central banks. Whether from a fundamental or broader market sentiment perspective, the seemingly insatiable demand for gold by global central banks is becoming increasingly important for the potential bull market in gold." Paul Wong, a market strategist at Sprott Asset Management, an asset management company, further stated that the continuous gold purchasing efforts by global central banks "have reached or are close to depleting the 'free-floating inventory' of tradable gold."

Torsten Slok, Chief Economist at Apollo Global Management, added that behind the continuous gold purchases by central banks, which have propelled the gold prices higher, there are also concerns about the fiscal situation in the United States. Based on this concern, they diversify the risks of holding U.S. Treasury bonds by buying gold.

Brien Lundin, editor of "Gold Newsletter," stated that a deeper reason lies in the sanctions imposed on Russia by the United States and its allies after the Russia-Ukraine conflict, weaponizing the U.S. dollar, which has led to "central banks trying to protect themselves by shifting reserve assets from the dollar to gold." He mentioned that as a result, 2022 was a record year for global central banks to purchase gold, with official purchases accounting for about one-third of the gold production that year. However, in recent months, the purchasing behavior of central banks seems to have slowed down.

It is also worth mentioning that in addition to central banks in traditional gold-loving Eastern countries such as China, India, and Turkey, the National Bank of Poland has gradually become a major buyer. In the second quarter of this year, the National Bank of Poland became the largest central bank gold buyer, purchasing 19 tons of gold to include in its reserves, increasing its total gold reserves to 377.4 tons. In 2023, Poland also recorded as the second-largest gold buyer, increasing its gold purchases by 130 tons for the year. Currently, gold accounts for about 14.7% of Poland's total reserves. Adam Glapiński, the President of the National Bank of Poland, recently stated that the Polish central bank will continue to increase its gold reserves, with the goal of holding at least 20% of its reserves in the form of gold. "This makes Poland a more credible country, our position is higher in all ratings, we are a very serious partner, and we will continue to buy gold. Our dream is to reach 20%," he said.

The National Bank of Poland first announced a plan to expand the country's gold reserves by 100 tons in 2021 and achieved this goal in September of last year. When announcing the plan, Glapiński cited financial security and stability as considerations, and hinted that concerns about the stability of the U.S. dollar were also one of the factors in the decision to increase gold reserves, "The National Bank of Poland must be prepared for the most adverse situations, which is why we consider gold to be particularly important in the process of foreign exchange management. Gold will still retain its value even if the global financial system is shut down and traditional electronic account records are destroyed. Gold has no credit risk and will not depreciate due to the economic policies of any country."Is there still room for gold prices to rise?

Amid such strong demand, according to a report released by Bank of America last week, gold prices have risen by 22% year-to-date, even surpassing the 17% increase of the Nasdaq index during the same period. In terms of other assets, the S&P 500 index has risen by 15.4%, commodities overall have only risen by 1.9%, government bonds have risen by 0.6%, and the US dollar has risen by 0.2% so far this year, which is even less than the gold trend. Bank of America suggests that even though gold prices are already high, investors should learn from central banks around the world and continue to buy gold. According to BoA data, gold has seen the largest inflow of funds in four weeks. The latest trading data from the US Commodity Futures Trading Commission (CFTC) also shows that gold speculative positions are at a four-year high.

Bank of America analysis suggests that the Fed's interest rate cuts in the coming months may trigger a rebound in inflation next year, and physical assets like gold have historically performed well during inflationary periods. "Central banks are continuously buying gold, and investors should keep up." Bank of America emphasizes, "Gold is the only asset that has outperformed US technology stocks and is one of the assets with the lowest correlation with stocks among all asset classes. As the downside risks of the US stock market continue to increase, gold may attract more investor inflows." In addition to buying gold directly, Bank of America also said that gold ETFs are also good targets for purchase, such as iShares Gold Trust Micro and SPDR Gold MiniShares Trust.

At the same time, Wall Street as a whole is optimistic about the subsequent trend of gold prices, and some analysts even predict that this round of gold prices can rush to $3,000 per ounce.

The Chief Investment Office (CIO) of UBS Wealth Management Investment sent an email to reporters on Monday, saying: "Gold has repeatedly set new highs this year and has outperformed the main stock indexes, reaching our target price of $2,500 per ounce in September 2024 earlier than expected. However, we believe that the rise in gold prices has not ended, and there is still room for further upward movement in the next 6-12 months. The year-end target price is expected to be $2,600 per ounce, and it will further rise to $2,700 per ounce by the middle of next year. One of the factors supporting our forecast is that, although the momentum will slow down from the record level in the first half of this year, we expect central bank buying to continue until 2025. Due to the low proportion of gold in total foreign exchange reserves, coupled with the trend of de-dollarization, we expect global central banks to buy 900-950 tons of gold this year." Another factor is that gold ETFs have seen a net inflow of funds for the first time since April 2022. Traditionally, the direction of ETF funds is negatively correlated with interest rate trends, which means that when US Treasury yields decline, gold demand (through ETFs) will rise. As the Fed is expected to start cutting interest rates in September, UBS expects more ETFs to receive inflows.

Bart Melek, head of global commodity strategy at TD Securities, predicted last Friday that gold prices may reach $2,700 in the next few quarters. Patrick Yip, senior director of business development at the American Precious Metals Exchange, even predicted that with global central banks buying more gold, geopolitical uncertainties continuing to exist, and multiple central banks around the world starting a cycle of interest rate cuts, gold prices may rise to $3,000 as early as next year.

Financial commentator Kimberley Koenig told reporters from First Financial that in times of high inflation and economic uncertainty, in addition to gold, gold stocks and gold ETFs should also occupy an important position in investors' asset allocation. He said that recently, AI concept stocks have shown a trend of differentiation, but gold stocks and gold ETFs have rebounded since March 1, with the increase in gold ETFs ranging from 19% to 41%, and are generally in the buying range. Among them, he is most optimistic about the S&P Gold Stock ETF (GLD), and other ETFs that track a variety of precious metals including gold, such as the US Global Gold and Precious Metals (GOAU), as well as gold ETFs that track gold mining stocks, such as iShares MSCI Global Gold Miners (RING), are also worth investing in his view.

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