“We are in what has never been seen in the last 55 years,” says Krishan Gopal, analyst for Europe at the World Gold Council, from London. The yellow metal shines brighter than ever. In 2022, global demand rose 18%, according to this organization, to 4,741 tons, the highest level since 2011.
The main drivers of this increase are the central banks, which have doubled their bullion purchases in a year to reach 800 tons, an amount not seen since the late 1960s, when the gold standard still existed. The World Gold Council describes last year’s acquisitions by entities as “colossal.”
To understand the why of this phenomenon, you must first understand the who. Well, the biggest buyers were the central banks of Turkey, China, India, Qatar or the Emirates. In general, institutions from emerging countries.
It is not something random. “There is an explanation of a geopolitical nature. This compulsive buying is a reaction to the freezing of the assets held by the Bank of Russia abroad as a result of the sanctions for the war in Ukraine. Central banks outside the West choose to protect themselves and prefer to accumulate more physical gold at the expense of investments in bonds”, says Roberto Ruiz Scholtes, director of strategy at UBS in Spain.
It has been speculated that these moves by central banks are in response to a broader move, termed by some as de-dollarization. In other words, the progressive reduction of dollar assets in their portfolios. “The skyrocketing purchases by the central banks of emerging countries are primarily a political message directed at Washington and against the dollar,” wrote Carsten Menke of Julius Baer. For example, mention should be made in this regard of the recent trade agreement between China and Saudi Arabia to pay for oil in yuan. The race for gold would be another step in this strategy.
However, the World Gold Council, in a survey carried out this summer among central banks, detected that the main reason for entities to get hold of gold is still the same as always: refuge and security in times of uncertainty. And the period we are experiencing, with a rise in inflation (in Turkey it reached 80%) and armed conflicts, places the yellow metal as the classic long-term safe haven value.
“We must not forget that central banks have started buying gold since 2010, so we are facing a trend that started a long time ago, after the Great Recession,” recalls Gopal. In his opinion, in the end the motivations continue to be the usual ones, “to obtain profitability, to obtain a liquid product and to confer a certain stability”.
A singular aspect is that this rise in demand is taking place at a time of rising interest rates, which usually hurts the yellow metal, since investors begin to have interesting alternatives when investing, for example, in bonds of the State that come to offer greater profitability.
However, analysts point out, the gold market came from a period of weakness and the context of inflation and international tensions have weighed on betting on the gold resource as an investment asset due to its protective nature.
This would also explain the increase in demand for bullion and physical coins by investors (especially in the Middle East but also in Germany), with demand at a nine-year high, while there was a decline in capital in ETFs (funds backed by the value of gold), since capital was attracted by other financial products.
Another factor that may have contributed to this renewed appetite for gold, according to David Cano of International Financial Analysts (AFI) is the recent collapse of cryptocurrency investment platforms.
Bitcoin has often been compared to gold (because cryptocurrency is a finite quantity and, in fact, its developers are called miners) and some savers may have chosen to return to a more traditional investment channel. From the virtual, to the stone.
