Central bank gold purchases set an all-time high: Why aren't bullion prices rising?
16:22, 1 November 2022
The official sector bought a net of 400 tonnes of gold in Q3 2022, which was 115% more than in Q2 and more than four times as much as in Q3 2021. It is the greatest demand for gold from central banks in a single quarter since the WGC series began, and nearly double the previous record of 241 tonnes set in the third quarter of 2018.
With a quarter still missing, 2022 is already the best year ever in terms of net gold purchases by global central banks.
Everything appears to shine for gold, but what are then the factors that continue to keep the metal's price depressed and 10% lower year to date?
Chart: Gold net purchases by central banks
The bulk of the increase in the global central banks’ net purchases of gold came from a couple of emerging market institutions.
Turkey remained the largest reported gold buyer this year. It added 31 tonnes in Q3, lifting its gold reserves to 489 tonnes (29% of total reserves). The Central Bank of Uzbekistan continued to build its gold reserves, buying another 26 tonnes in Q3. The Qatar Central Bank was also a significant buyer in Q3.
The Reserve Bank of India continued with its long-standing gold purchasing strategy in Q3. It bought 13 tonnes in July and 4 tonnes in September, pushing its gold reserves to 785 tonnes.
According to the WGC survey, one-quarter of respondents stated their intention to increase gold reserves in the next 12 months (up from one-fifth in 2021).
The gold purchases made by central banks around the world constitute only a portion of the total demand for bullion, which also includes the consumption of jewellery, investments in gold bars, coins, ETFs, and technology.
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Chart: Gold demand breakdown (Q3 2022 vs Q3 2021)
Gold ETFs continue to register outflows
The fundamental cause for this year's negative gold price performance is due to large investor outflows from gold ETFs.
In the third quarter, the investment climate for gold was dominated by broad, multi-decade high inflation and its effect on interest rates. Global financial conditions have tightened further, and the Fed has raised interest rates at the fastest rate in history, pushing US real yields to their highest levels since the Great Financial Crisis.
While central banks throughout the world raised interest rates significantly and the US dollar rose in value, gold ETF investors trimmed their holdings as they positioned elsewhere given gold's rising opportunity cost.
During the third quarter, global gold ETFs experienced redemptions totaling 227 tonnes (US$12 billion), bringing the total gold holdings of all ETFs to 3,548 tonnes (US$191 billion) as of the end of September.
It’s the fifth straight month of outflows in gold-backed ETFs, which has nearly completely reversed the 316 tonnes of inflows that occurred from January to April. Inflows into gold ETFs now total just 7 tonnes since the start of the year.
Gold fundamental analysis: Stuck in a downtrend until the Fed pivots
The fundamental factors impacting on gold have not subsided materially, and bullion prices remain stuck in a downtrend.
Year-to-date performance is down 10%, while the drop from the peak in March is about 20%, indicating that gold is in a bear market.
The gold price outlook for the upcoming months hinges on the Federal Reserve's willingness to continue raising interest rates and tightening monetary policy.
The market will focus on the Fed's next actions at its FOMC November meeting, with investors already pricing in a 5% rate peak in March 2023, followed by a drop to 4.6% by the end of 2023.
Hawkish surprises on this front, with a Fed eager to raise more than the market anticipates, may revive interest in the dollar and increase treasury yields, which would be negative for gold.
Gold prices may test their year-to-date lows near $1,614/oz if the Fed leaves the door open for another 75bps raise in December and fights back against dovish repricing for next year.
In contrast, if the Fed were to signal a slowdown in the pace of hikes and raise warnings on the economic outlook, it would benefit precious metals, which would experience a rebound in the investment demand that has been sorely absent in 2022.