Gold: The Central Banks Keep Slow Fire Burning

Gold prices showed a certain tiredness today, on February 1st, snapping three consecutive sessions of gains after Federal Reserve Chairman Powell’s directionless rhetoric trimmed expectations of a U.S. rate cut by March. However, losses were limited against the current geopolitical backdrop, also supported by bids for safe-haven assets in the wake of what is perceived as a tumultuous year ahead. The bullion is still unambiguously considered a hedge against inflation and economic uncertainties, but higher rates increase the opportunity cost of holding the non-yielding asset.

Meanwhile, the WGC released its long-awaited report containing estimates for worldwide gold demand in 2023, although amid high rates, investment demand via ETFs was rather negative — that didn't stop demand from rising 3%. While gold would have fared well at these rates in the past, there are new factors at play.

The main boost for the gold market is the demand from central banks, which for the second year are buying more than 1000 tons per year, and even local sell-offs in Turkey (the currency ran out before the elections and had to sell gold to hold the lira) did not change the picture: 1037 tons for 2023.

Moreover, for the central banks themselves it is generally quite modest ~$65 billion per year (with foreign exchange reserves of almost $12 trillion). For example, NBK buys continuously at the rate of ~60 tons per quarter and bought 225 tons in 2023. The issue here is not even in volumes, but the pace — every quarter, non-stop so far. This forms a so-to-speak reinforced concrete floor of price support — most central banks aren’t in a hurry and just systematically buying, offering the “asking support”. In 2023, demand in the over-the-counter market (OTC) has picked up, where big money is quietly buying large volumes without unnecessary regulation (~450 tons in 2023 — an increase of more than 8 times).

Given that 2024 is a year of big risks: political (elections), geopolitical (Middle East, Ukraine, Taiwan, China-US — you name it!), economic (increasing likelihood of stagnation/recession), financial stability risks (rising debt, liquidity issues, interest rates), etc., in general demand is more likely to be sustained. Although positive real rates are limiting gold's rise, but Fed’s reversal could add momentum, although so far the market seems to be overly optimistic in terms of rate cut expectations.

In any case, CB purchases and a wide range of risks are likely to continue to provide strong support for gold prices.