This central bank is likely to remain a major buyer in the Investing.com gold market

The growth of Investing.com — this year has surpassed other commodities, such as and , noting it in global markets.

The rise in gold prices has been driven in part by central bank purchases, which have become a significant factor in recent years.

According to analysts at BCA Research in a note dated Friday, central banks, especially those in emerging markets, have expanded their gold reserves, and this trend is expected to continue.

These purchases have contributed to the sustained demand for gold, supporting the potential for near-term price increases.

In recent years, central banks have become one of the most important drivers of gold demand. “Central bank purchases in the first half of this year reached the largest first half of the year on record since 2000,” analysts said.

Over the past two years, central banks have accounted for about a quarter of global gold demand – more than double the 11% average over the past five years. Emerging market central banks have led this charge, increasing their reserves of the precious metal for a variety of strategic reasons.

The reasons behind central bank gold purchases are related to several key factors. Gold’s value is supported by its limited supply, which differs from fiat currencies that can be subject to inflation or devaluation due to an increase in the money supply.

As a result, gold serves as a hedge against inflation and currency devaluation, which are important considerations for central banks.

In addition, gold carries no credit or counterparty risk, providing central banks with protection against economic instability or financial disruption.

In addition, gold’s tendency to move inversely to the US dollar provides a means of diversifying reserve portfolios, helping to protect reserves during periods of dollar weakness.

Geopolitical considerations further fueled the push for gold.

“The Western response to Russia’s invasion of Ukraine ultimately underscores the vulnerability of holding reserves in traditional currencies,” analysts said.

Sanctions against Russia have resulted in a freeze on its foreign exchange reserves, prompting other countries to consider the security of their own reserves.

Gold, being a tangible asset that central banks can fully control, provides protection against such risks.

According to the World Gold Council’s latest Central Bank Gold Reserves Survey, the outlook for continued central bank demand is robust.

The survey found that 81 percent of central banks expect global gold reserves to rise next year, the highest percentage in the survey’s six-year history.

This feeling is not only global; 29% of central banks specifically expect to increase their own gold reserves, signaling a strong commitment to further accumulation.

One of the central players in this wave of gold purchases is the People’s Bank of China (PBoC). Since 2022, the PBoC has increased its gold reserves by an impressive 316 metric tons, an average of 11 tons per month.

However, in recent months (May to July 2023), the PBoC has reported no new purchases, raising questions about whether rising gold prices have caused a temporary pause in their buying.

BCA Research analysts believe that while the PBoC may be sensitive to short-term price fluctuations, its long-term strategy to diversify away from US dollar-denominated assets will remain the dominant factor.

Gold plays a crucial role in China’s effort to reduce reliance on the dollar, and this strategic imperative will likely underpin future purchases regardless of near-term price trends.

Historically, the PBoC has been known for its opaqueness regarding gold purchases, often revealing large increases only after years of accumulation. For example, in 2015, China revealed that it had increased its gold reserves by 60% over the past six years, during which no purchases were reported.

Despite its recent gold-buying outlook, gold still accounts for just 4.9 percent of China’s total reserves, compared with an average of 15 percent for other upper-middle-income economies. This leaves substantial room for further accumulation.

If the PBoC were to increase the share of gold in its reserves to 15% over the next decade, it would need to buy about 120 tonnes of gold per quarter, which would represent 11% of annual global gold demand at current levels. Such an increase would have an impact on the gold market, pushing up prices further.

China is not alone in its enthusiasm for gold. Other emerging market central banks have significantly increased their gold holdings in recent years. Poland, for example, has explicitly set itself the goal of increasing the share of gold in its reserves from 13.5% to 20% in the coming years.

The Polish central bank has already bought 149 metric tons of gold from the second quarter of 2023, and further purchases are expected. This aligns with a broader trend among EM central banks to diversify their reserves and reduce their exposure to the US dollar.

Similarly, the Reserve Bank of India has steadily increased its gold reserves as part of a strategy to diversify its assets. The RBI has also repatriated a significant portion of its gold reserves from foreign vaults, transferring 100 tonnes from the UK to India earlier this year.

Nigeria took similar action, repatriating its US gold to domestic storage. These moves reflect the growing desire of EM central banks to protect their gold reserves and shield them from potential geopolitical risks.

The broader strategic trend of central banks in emerging countries increasing their gold holdings is clear. Gold provides these countries with a safe store of value free of the potential risks associated with holding foreign currency reserves, particularly the US dollar.

The geopolitical climate and recent global events have reinforced the importance of this diversification strategy.

In addition, the current economic outlook is also supportive of gold. According to BCA Research, a global economic downturn is expected until late 2024 or early 2025, when gold has typically performed well.

During periods of downtrending economic activity, central banks often increase their purchases of gold as a precaution. As a result, the potential for an economic slowdown next year is likely to support strong demand from central banks.

In addition to central bank demand, real interest rates are a key factor influencing gold prices. As real interest rates in the US fall, the opportunity cost of holding gold falls, making it a more attractive investment.

“Real interest rates are likely to decline as the Fed is likely to begin its easing cycle at the September 17-18 FOMC meeting,” analysts said, which would further spur both institutional and central bank gold buying.

Indeed, global gold ETFs have already posted four straight months of inflows, reversing nearly a year of outflows and signaling renewed investor interest.