‘Colossal’ central bank buying drives gold demand to decade high

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In 2022, demand for gold reached its highest level in more than a decade, fueled by “colossal” central bank purchases that highlighted the safe haven asset’s appeal during times of geopolitical upheaval.

According to the World Gold Council, an industry-backed group, annual gold demand increased 18% last year to 4,741 tonnes, the highest amount since 2011, driven by a 55-year high in central bank purchases.

Many analysts attribute the move to a desire to diversify reserves away from the dollar after the US froze Russia’s reserves denominated in the currency as part of its sanctions against Moscow. Retail investors also piled into gold to protect themselves from rising inflation.

Central banks purchased 417 tonnes of gold in the final three months of the year, nearly a year’s worth more than in the same period the previous year. It brought the annual total to 1,136 tonnes, more than doubling the previous year.

WGC senior analyst Krishan Gopaul said “colossal” central bank purchases are a “huge positive for the gold market,” even though the industry group predicted that matching last year’s purchases would be difficult due to a slowdown in total reserve growth.

“After two decades of net sales, central banks have been net purchasers of gold since 2010. “In this environment, we’ve seen central banks accelerate their purchases to a multi-decade high,” he said. He added that the metal’s lack of “counterparty risk” was a key attraction for central banks when compared to currencies controlled by foreign governments.

Only about a quarter of central bank purchases in the fourth quarter were reported to the IMF. Turkey took in nearly 400 tonnes in 2022, followed by China, which reported buying 62 tonnes in November and December, and Middle Eastern nations.

The remainder, according to gold industry analysts, is accounted for by central banks and government agencies in China, Russia, and the Middle East, which may include sovereign wealth funds.

“Portfolio diversification is the main reason,” said James Steel, a veteran precious metals analyst at HSBC, for US dollar-laden central banks buying gold. “A key reason for choosing gold is that central banks are limited in what assets they can hold, and they may be hesitant to commit to other currencies,” he adds.

Demand for bar and coins among retail investors increased to a nine-year high in 2022, exceeding 1,200 tonnes, with strong demand in Europe, Turkey, and the Middle East offsetting weakness in China, where buyers were confined to their homes due to Covid lockdowns.

Gold prices fell from a record high above $2,000 per troy ounce in March to just above $1,600 per troy ounce in November as rising interest rates caused $3 billion in outflows from gold-backed exchange traded funds over the year. When interest rates on low-risk bonds rise, gold’s appeal to investors diminishes.

However, demand from central banks and retail investors helped to keep the yellow metal from falling further, setting the stage for a powerful rally that has lasted since November.

Gold has risen nearly a fifth in three months to $1,928 per troy ounce, its highest level in nine months, aided by the US Federal Reserve signaling that it will slow the pace of rate hikes.

The World Gold Council anticipates a rebound in institutional demand for gold this year as interest rates in major economies approach their peak, while falling inflation may dampen demand for bars and coins.

UBS raised its year-end target for gold to $2,100 per troy ounce, up from $1,850 previously, due to exceptional central bank buying and an expected return of inflows for gold-backed ETFs.