Could Chinese gold buying accelerate in 2023?

According to the World Gold Council, central bank buying in the first nine months of 2022 was the highest since 1967 – prior to abolishing the gold standard.

Net purchases by central banks increased each quarter, with the third quarter hitting 399 tonnes. Fourth-quarter data is yet to be compiled but could be very bullish for gold.

Central banks had already indicated their plans

According to a World Gold Council survey published in June 2022, fully 25% of central bank respondents said they had plans to increase their gold reserves. This ratio has increased each year since 2019 when only 8% expected to increase their gold reserves.

This continues a trend from the global financial crisis when central banks switched from being net sellers of gold until 2007 to net buyers every year since 2008. Average annual net gold purchases have been 419 tonnes, according to the World Gold Council.

Central banks telegraphing their gold sales could significantly impact the market. It certainly appeared to have in the UK treasury sales of 1999-2002, which were announced by the then Chancellor of the Exchequer Gordon Brown ahead of time. Gold prices fell and the UK sold at an average of $275 an ounce.

This time with central banks appearing to telegraph further buying, prices could go the opposite way.

China has returned to the market

The People’s Bank of China purchased 32 tonnes of gold in November and another 30 tonnes in December. These are the first purchases by the Chinese central bank since 2019 and could mark the beginning of regular additions to its reserves.

The return of the Chinese bank to the gold market is significant because its $3.4 trillion in foreign exchange reserves dwarf gold production of 3,580 tonnes (2021), which at $2,000 per ounce would be valued at $0.23 trillion.

Since news broke in December that China is once again buying gold, the yellow metal has jumped in price from $1,800 to $1,910 per troy ounce.

How to gain exposure to gold prices

There are four main methods to speculate on rising gold prices:

• Buying physical gold
• Buying futures
• Buying gold ETFs
• Buying shares in gold miners

Physical gold

There’s a certain satisfaction and sense of ownership in holding physical gold in your hand. You aren't dependent on any third party to access the gold and won't be denied access to your money in the case of a blackout. This security is the main advantage of physical gold.

In investment returns, however, the transaction costs and storage costs of gold bullion coins and bars make it impractical for trading. Bullion is generally considered a long-term buy-and-hold investment.

Gold ETFs

There are a number of gold exchange-traded funds (ETFs) available on the ASX and other stock exchanges. These have the benefit of significantly lower transaction costs, zero storage costs, and leveraged exposure through options, margin or CFDs. The benefit of leverage - potentially higher profits - comes with the associated risk of potentially higher losses.

Gold futures

Gold futures enable investors to exchange gold for a fixed price on a set date in the future. This can give investors significant exposure to rising and falling gold prices and entails significant risk.

Gold mining companies

Because gold miners have significant costs (averaging $1,290 per ounce, according to the World Gold Council), gold mining shares tend to be more sensitive to movements in the gold price than gold itself.

For example, Newcrest Mining shares are up 9.2% in the first 19 days of 2023, nearly double the gain in gold prices over the same time frame (4.7% in USD terms). Individual mining stocks also trade on their business performance, so they won't always move in direct correlation to the gold price.

To take out the individual characteristics of a single company in a single country, the BetaShares Global Gold Miners ETF gives investors exposure to gold miners around the world and is hedged in Australian dollars.

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