It’s gold’s dirty secret that the market and most of its players won’t acknowledge – gold prices have been supported for most of 2022 by the speculative buying of a group of central banks from emerging or stagnant economies like Turkey, India and Mozambique.
In fact it was the record demand for gold from central banks in the third quarter – they bought, collectively, 399 tonnes – that enabled the gold price to ride out what was an otherwise unsteady quarter.
Gold prices fell around 9% and would have fallen more without that supportive buying from the group of banks as the rising interest rates and a stronger greenback eroded buying interest and sent investors fleeing from the metal.
The purchases in the September quarter were more than three times the level of central bank purchases in the same quarter of 2021.
The 399 tonnes was an all-time high for a quarter and so far in 2022, central banks have bought 669 tonnes of gold – the highest ever for not only a 9 month period, but the figure would be a peak for a year if central banks bought no more gold over the rest of this year.
From what the World Gold Council says much of the demand came from central banks taking advantage of the price fall and lifting their purchases to a record 399 tonnes for the quarter.
Central banks from Turkey, Uzbekistan and Qatar ignored the friction caused by the stronger dollar and were among the largest reported buyers in the quarter, the WGC said.
Turkey was the biggest buyer of gold during the quarter with 31.1 tonnes, followed by Uzbekistan (26.13 tonnes) and India (17.46 tonnes). Not all countries report their gold purchases regularly, so it’s difficult to know how much, for example, China and Russia bought during this same period.
Qatar bought 14.77 tonnes and Mozambique bought 2.33 tonnes
The Reserve Bank of India (RBI) bought 13 tonnes of gold in July and 4 tonnes in September, pushing its reserves to 785 tonnes, according to the WGC.
The buying in 2021 – when central banks bought 463 tonnes (up more than 80% from pandemic suppressed 2020) saw a total of 15 central banks buy a tonne or more over the year. India, Hungary, Brazil, Uzbekistan and Kazakhstan and Thailand led the way. Thailand which last increased its gold reserves in 2017, was the largest buyer in 2021 buying 90 tonnes in total.
But that paled compared to what has been snapped up this year by central banks. China though has been absent, even as some media reports claimed interest from the People’s Bank of China. It gets most of its gold these days from the country’s gold mining industry, the world’s largest.
If and when the US dollar turns (presumably when markets are convinced the US Federal Reserve has inflation under control and falling), there will be some nice paper profits for the buying central banks,
The solid buying from central banks accounted for a massive 34% of total demand for the metal in the quarter and overrode the sharp fall in demand from investors as more than 200 tonnes of metal flowed out of Exchange Traded Funds (ETFs).
Central bank demand has this year at least, replaced demand from investors.
What was astounding was that investment demand slumped sharply, despite those fears about Russia’s invasion of Ukraine, increased tensions in Asia being driven by China’s assertiveness and the fears about rising inflation.
Instead, investor demand was hit hard by the realities of rising official interest rates, especially from the Fed which then fanned the rise in the value of the US dollar.
The strength of the greenback saw gold prices end the quarter around $US1,645 an ounce – around where it is now. That saw the down more than 9% year in the three quarters to the end of September.
Thanks to the buying by central banks and the jewellery sector, demand for gold rose 28% in the quarter to 1,181 tonnes, with demand in the first 9 months of 2022 up 18% and back to pre-pandemic levels, which is a big positive for the metal.
The 47% slump in investment demand to 124 tonnes from the same quarter in 2021 was mainly due to outflows from exchange-traded-funds with investors cutting holdings by 277 tonnes in the face of rising interest rates globally as well as the strength of the US currency.
The US dollar has now fallen by around 8% from its most recent peak as investors think they can spot a pivot to lower and slower rate rises in 2023.
Optimistically, the WGC hopes that much of the negative sentiment toward gold might now have been “flushed out of investment,” suggesting that the impact of further rate hikes and dollar strength could be fading.
“On the three previous occasions when combined selling of futures and ETFs exceeded 400 tonnes, gold rallied during the following three to six months,” the council added.
In commentary, the WGC said, “Globally, investment was down 47% year-on-year, as investors responded to a challenging combination of markedly higher interest rates and a strong US dollar with significant outflows from ETFs.
“These movements, alongside weakness in OTC demand and negative sentiment in futures markets, hampered gold’s price performance” in the quarter.
“Despite these headwinds, gold continued to hold favour with retail investors who reacted to different market cues and turned to gold for its status as a store of value amidst rampant inflation and geopolitical uncertainty.
“Investors sought to hedge inflation with bar and coin investment, driving total retail demand up 36% year on year (y-o-y). This was supported by significant purchasing in Turkey (up more than fivefold y-o-y) and in Germany (up 25% y-o-y at 42 tonnes), but also from visible contributions across all major markets.
“Jewellery consumption continued to rebound and is now back to pre-pandemic levels, reaching 523 tonnes – 10% higher compared to Q3 2021.
“Much of this growth was spearheaded by India’s urban consumers who drove up demand 17% y-o-y to 146 tonnes.
“Similarly impressive growth was also seen in much of the Middle East, with Saudi Arabian jewellery consumption up 20% since Q3 2021, and United Arab Emirates up 30% for the same period.
“Chinese jewellery demand also saw a modest 5% increase y-o-y driven by improved consumer confidence, a dip in the local gold price in July and the release of some pent-up demand,” the Council commented.
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In Australia the Council said there was a 17% net increase in Australian retail demand for gold from the September quarter of 2021.
Jewellery demand surged by 71% to 2.3 tonnes in the quarter from the low, Covid-affected September 2021 quarter figure of 1.4 tonnes but demand for gold bars and coins grew just 1% over the quarter, from 4.7 tonnes a year ago to 4.8 tonnes in the three months to September 30 this year.
Australian jewellery demand grew faster than it did globally (Australia is a very small market), while local demand overall grew slower than the world.
One area where Australia did stand out, according to the council, was the size of the outflow from local gold backed ETFs – just 1% of the reported 42 tonnes backing local funds.
