Weak Growth Sparks Surge in Central Bank Gold Demand

Central bank gold demand has been a critical pillar behind the precious metal’s impressive rally this year, and according to one research firm, this trend is not going away.

In a recent report, Roukaya Ibrahim, Strategist at BCA Research, said gold’s luster continues to outshine other commodities as it experiences robust demand, specifically from emerging market central banks.

“Central bank gold buying is likely to remain a tailwind for the yellow metal, supporting a continuation of the rally over the coming years,” she said.

Ibrahim noted that since 2022, central bank gold purchases have accounted for a quarter of total global demand, more than double the five-year average of around 11%.

She explained that given gold’s role as a global monetary metal, it’s not surprising that central banks are increasing their reserves. Ibrahim noted that because supplies are limited, gold acts as a natural hedge against inflation and currency devaluation.

Ibrahim added that gold is also a geopolitical hedge, as it carries no third-party counter-risk. In a world where Western allies have weaponized the U.S. dollar, gold is an attractive alternative currency.

“Unlike traditional currencies, a central bank’s access to its gold holdings cannot be blocked by other governments,” she said. “The West’s response to Russia’s invasion of Ukraine ultimately underscores the vulnerability of holding reserves in traditional currencies.”

The Montreal-based research firm also expects gold to serve as a hedge against geopolitical uncertainty, as the risks of a recession continue to rise.

“Central banks typically boost their purchases during periods of below-trend economic activity,” Ibrahim said. “In this sense, the high odds we assign to an economic downturn over the coming 12 months would coincide with robust central bank gold purchases.”

While the broader trend among emerging market central banks remains positive for gold, a lot of attention is specifically focused on China, which has not announced any new purchases in the last four months, following an 18-month shopping spree.

Ibrahim said that despite the pause in the last four months, China is far from done accumulating gold.

“We believe that the PBoC is sensitive to high gold prices in the short run, but it is not price-sensitive in the long run. Its strategic desire to reduce exposure to USD-denominated assets will dominate and continue to drive its accumulation of gold, regardless of the price level,” she said. “Thus, the lack of reported gold purchases by the PBoC over the past three months may simply be a pause, rather than a sustained halt in buying.”

Ibrahim added that this new trend could be just another part of a broader strategy.

“It is possible that authorities are opting to be less transparent about their purchases. It is worthwhile remembering that, in the past, the PBoC was often secretive about its gold purchases, reporting them with a multi-year delay,” she said.

Currently, gold represents roughly 5% of China’s foreign reserves. BCA said that it could take 10 years for the People’s Bank of China to increase its gold holdings by 15%. To reach that goal, the central bank would have to buy 120 tonnes of gold quarterly.

“The PBoC’s record quarterly purchase of 78 tonnes in the third quarter of 2023 is roughly three-fourths of this volume. For context, the 480 tonnes of annual gold purchases in this scenario represent 11% of total annual gold demand in 2023,” said Ibrahim.

This article originally appeared on Kitco News.