The price of gold (XAU) has soared to record highs this year. The value of the commodity has increased by almost 33% since January alone, with gold now trading at comfortably over $2,700 per troy ounce. This is despite the fact that the factors which usually drive the price of gold would suggest that the price should be declining.
For one, inflation is on the fall in most major economies, reducing the value of gold as an inflation hedge, which has traditionally been its central purpose. Given that gold tends to be dollar-denominated, a strong US dollar tends to drive gold prices lower, and the greenback has traded at historically strong levels for the past few years now. An environment of higher interest rates, as we have now, also usually feeds into a weaker XAU price as it is an asset that offers no yields. Yet the price of gold continues to rise. Why?
It appears that gold has practically decoupled from factors, such as inflation and the US dollar, which have traditionally influenced its price. Instead, demand for gold as a reserve currency among central banks is increasingly the most important factor driving the price of XAU.
Indeed, according to the 2024 Central Bank Gold Reserves (CBGR) survey, 29% of respondents intend to increase their gold reserves in the next twelve months – the highest level recorded since the survey began in 2018. At the same time, 13% of the central banks surveyed said they envisaged dollar-denominated foreign exchange reserves being “significantly lower” in five years’ time, while almost half (49%) said they would be “moderately lower.” Two-thirds of respondents said that the proportion of gold in their foreign exchange reserves would be “moderately higher” in five years’ time, with a further 3% saying they would be “significantly higher.”
The data suggests that central banks around the world are ramping up their purchases of gold in order to make their reserves less reliant on the US dollar. Net buying of gold among central banks in the first half of 2024 amounted to 483 tonnes, 5% above the previous record of 460 tonnes that was set in the same period the year before.
The National Bank of Poland (NBP) was the biggest purchaser of gold in the second quarter of this year, with the Polish central bank governor Adam Glapinski recently saying he plans to increase gold’s share of total reserves to 20%. The Reserve Bank of India was close behind, while the Central Bank of Turkey has been the biggest purchaser of gold this year so far.
The Central Bank of Uzbekistan, the Czech National Bank, the Central Bank of Qatar, the Central Bank of Russia, the Central Bank of Iraq, the Central Bank of the Kyrgyz Republic, and the Monetary Authority of Singapore all reported significant gold purchases in the same period. The People’s Bank of China bought 316 tonnes of gold between November 2022 and April 2024 but has slowed down slightly in the last few months.
With the possible exception of Singapore and Poland – although Warsaw has at times found itself at odds with Brussels and Washington DC over its domestic policies – it is no coincidence that these countries are all powers which, to greater or lesser degrees, consider themselves to be non-Western aligned countries.
Their purchases of gold therefore appear to be a direct response to the US’ weaponisation of the greenback, which reached new heights after Russia’s invasion of Ukraine in February 2022. The US used the dollar’s preeminent position in global trade to freeze Russia out of key financial institutions such as the SWIFT payment network and froze $300 billion worth of Russia’s dollar-denominated foreign reserves.
To many governments around the world, not just in Moscow, this made it clear that diversifying away from the dollar was a strategic necessity. Why keep dollar reserves if the US can arbitrarily decide to freeze them in response to a foreign policy decision with which they disagree? Little wonder that it was in 2022 that gold’s inverse relationship with US real yields broke down. It was at that precise moment that central banks worldwide realised acquiring gold was of crucial importance to guarantee autonomy:
Given the increased demand for gold among central banks, which shows no sign of slowing down, many investment banks are forecasting that the price of gold will continue to rise as we head into 2025 and beyond. Goldman Sachs have predicted that the precious metal will hit $3,000 per troy ounce by the end of 2025 because “sizable central bank purchases of gold bars have reset the relationship between rate and price levels since 2022.”
Goldman Sachs Research has estimated that 100 tonnes of physical demand lifts gold prices by at least 2.4%. With emerging markets around the world determined to pursue a policy of de-dollarisation, it is likely that central bank demand for gold will continue to grow.
Author: Harry Clynch
#Gold #USDollar #CentralBanks #XAU
