Central Bank Gold Buying Expected To Remain Hot Over Next Several Years

Authored by Mike Maharrey via Money Metals,

Net central bank gold buying exceeded 1,000 tons two straight years, and commodity analysts at ANZ Bank expect central bank gold demand to continue hot for at least the next six years.

[Emerging market] central banks could purchase over 600 tons of gold annually until 2030, to take its share in their foreign reserves to 10 percent. China will likely occupy the lion’s share in global official gold demand.

Analysts at the Australian bank noted that annual central bank gold demand has nearly tripled and now makes up 25 to 30 percent of total global demand.

Central bank net gold purchases totaled 1,037 tons in 2023. That fell just 45 tons short of 2022’s multi-decade record.

China was the biggest buyer in 2023. The People’s Bank of China officially reported a 225-ton increase in its gold reserves.

Total central bank gold buying in 2022 came in at 1,136 tons. It was the highest level of net purchases on record dating back to 1950, including since the suspension of dollar convertibility into gold in 1971.

ANZ analysts say the recent bout of price inflation helped drive central bank gold demand.

Recent inflation shocks globally, aggressive policy rate hikes in the developed markets, and valuation losses on foreign currency reserves held by emerging market (EM) central banks have enhanced Gold’s appeal relative to bonds in their portfolios.

ANZ analysts also pinpoint declining faith in the bond market – particularly U.S. Treasuries – as another reason central banks are diversifying into gold.

Depleted trust in the US fixed-income assets and the rise of non-reserve currencies are other themes that could support central bank gold buying.

ANZ notes U.S. Treasuries represent approximately 59 percent of the total foreign currency reserves globally. But bond prices have dropped precipitously since the Fed embarked on its monetary tightening project to address hot price inflation.

Higher interest rates also led to dollar strength, making servicing dollar-denominated debt much more expensive.

According to ANZ, about 50 percent of the decline in Asian central bank FX reserves in 2022 was due to valuation losses.

This was quite large and has likely left a lasting sour taste. It is unsurprising, therefore, that central banks are diversifying their reserves away from bonds.

Financial analyst Jim Grant has warned about a “generational bear market” in bonds. In an interview on the Odd Lots Podcast last summer, Grant said he thinks we’re at the beginning of a long-term trend of a weak bond market with higher interest rates that could last decades.

I speculate that we are embarked on a long cycle of rising rates. And I say that first of all, for reasons of pattern recognition, there’s no theory behind it. But I observe that in 2020 and ‘21, some unimaginably large number of debt securities were priced to yield less than nothing. Bloomberg keeps this particular figure. And I bet still, perhaps you could check me on this, I bet still there’s like a hundred billion of bonds priced to yield less than nothing worldwide. But there were $18 trillion, I think at the peak.

[It was] the most extraordinary expression of unqualified bullishness on an asset class because it had the name of ‘bonds’ which had been falling in yield, rising in price. So no, it would not surprise me at all if we were embarked on something resembling a generation-length bear market in bonds, meaning rising yields and falling prices that would fit the form.

According to ANZ, the recent run of central bank gold buying could be part of a broader move away from the dollar.

The global monetary system is evolving, with EMs pushing their own currencies for international payments. China is reportedly settling trades with Russia in RMB and has made clear its intention to internationalize its currency. Other regional players, like India, are also pushing to settle foreign trade in their own currency. This evolving multi-currency system will see a gradual shift in foreign currency reserve portfolios, and gold is likely to play an important role as this develops.

Photo courtesy of the Bank of England used under Creative Commons license.