Central banks are on a gold-buying binge. Where next for gold prices?

Between July 1999 and March 2002, the Bank of England sold 395 tonnes of gold at an average price of $275 an ounce. As this massive sale was announced ahead of time, it drove the price of gold down as far as $256 in April 2001 – the lowest level since 1979 and a level never revisited since. This is commonly referred to as ‘Brown’s Bottom’ after the then Chancellor of the Exchequer, Gordon Brown.

As of 23 March 2023, gold is trading at USD1976 an ounce – more than seven times its 2001 low and just 5% below its high of $2075 on 8 March.

Gold, like any market commodity, has its price set by market demand and supply. Unlike many other commodities, however, gold demand is often driven by sentiment rather than actual need – you can’t eat gold or power your car with it.

Just like when the Bank of England selling its gold drove the price down, central banks buying gold could influence sentiment and drive prices up.

Central banks buying gold

In 2021, the Central Bank of Ireland doubled its gold holdings to 12 tonnes.

Russia increased its reserves from 400 tonnes in 2007 to 2,300 tonnes in 2020. The country appears to have halted open market purchases since 2020.

According to the World Gold Council, central banks purchased 1,136 tonnes of gold in 2022 – the largest amount added in over 50 years. This took total gold demand to 4,742 tonnes – outstripping mine supply of 3,612 tonnes by 31%.

Demand in 2022 was the highest since 2011, which coincided with the then-record-high gold price of $1,917. Given the amount of quantitative easing and monetary inflation over the past ten years, it’s possible that gold prices could climb higher than the current $1,934.

Purchases continue in 2023

• Turkey appears to be on a buying spree, purchasing 150 tonnes in late 2022 and early 2023.
• hina has resumed purchases for the first time since 2019, purchasing 62 tonnes in Q4 2022 and another 31 tonnes in January 2023.
• The Monetary Authority of Singapore added 44.6 tonnes to its official reserves in January 2023 – an increase of 29%.

Another inflection point – 10-year treasury yields

Gold prices are known to follow the price of the US 10-year treasury bond. So when yields rise, gold prices fall. It appears that the 10-year treasury bond peaked in October 2022 and is trading around 60 basis points below the 4.25% peak.

Where to from here?

Logic would suggest that the expansion of bank balance sheets, exponential increase in government debts, and correction in cryptocurrencies would be bullish for gold sentiment and prices. However, logic appears to only apply to the long term.

Three key drivers may impact gold prices this year

1. Continued purchases by central banks. Bankers tend to be risk averse and this includes going against the trend. Right now, the trend seems to be purchasing gold.

2. US 10-year treasury yield. Even with the Federal Reserve raising the target cash rate, if the yield on the longer 10-year notes remains low, this could be bullish for gold prices.

3. Uncertainty. Gold is generally considered a safe haven – somewhere to put money to preserve value rather than increase its value. Uncertainty about the Ukraine war, China-Taiwan relations, inflation and US bank failures could spark demand for gold.

Inevitably, gold prices will go in both directions, although recently they have been rising.

How to profit from rising gold prices

There are six ways to get exposure to gold:

• Bullion
• Spot gold
• Gold futures
• Gold options
• Gold ETFs
• Gold stocks

Find out more on how to trade or invest in gold.

In addition, it’s possible to trade ETFs and stocks using contracts for difference.

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