Central Bank Gold Demand Dominates UK Market

Central bank gold demand continues to dominate the gold market in the UK, and could be a significant factor in why the precious metal continues to hold critical long-term support levels in the face of rising bond yields and persistent US dollar strength.

The World Gold Council (WGC) reported in October 2023 that central banks bought 77 tonnes of gold in August, an increase of 38% compared to July’s purchases. The WGC noted that during the last three months central banks have bought 219 tonnes of gold. The analysts said that central bank demand is on course to see healthy demand for the year.

“This recent buying suggests that we have now firmly moved past the net selling we saw in April and May, which was primarily driven by heavy, non-strategic selling from Turkey,” said Krishan Gopaul, senior analyst at the WGC, in the report. “We are therefore confident that the long-term trend of healthy central bank demand remains in place.”

However, while demand has been robust, Gopaul noted that buying activity has been limited to a small number of central banks. China continues to dominate the market after it bought 29 tonnes of gold in August.

Since it started its buying spree in November 2022, the People’s Bank of China has increased its gold reserves by 217 tonnes to a total of 2,165 tonnes, which represents just over 4% of their total foreign reserves.

The National Bank of Poland also remains a significant buyer after purchasing 18 tonnes of gold in August. Gopaul said that Poland’s national bank has bought 88 tonnes of gold so far this year and is on target to reach the 100 tonne target it announced in 2021.

Gopaul noted that Poland’s gold reserves at 314 tonnes now represents 11% of their total foreign reserves.

Another central bank the WGC has been watching closely is Turkey, which bought 15 tonnes of gold in August. The central bank continues to rebuild its reserves after significant selling in April and May.

Other central bank buyers included Uzbekistan, which increased its gold reserves by 9 tonnes, the Reserve Bank of India, Czech National Bank and the Monetary Authority of Singapore which each bought 2 tonnes of the precious metal in August, and National Bank of the Kyrgyz Republic, which purchased 1 tonne.

The WGC said that there were no notable gold sellers last month. However, Gopaul said that they are looking at reports that the Central Bank of Bolivia “monetized” 17 tonnes of its gold reserves, according to reports from Bloomberg.

“If confirmed, this would represent a 40% decline in its gold reserves (tonnage terms). Until confirmed, however, there is ambiguity in the use of “monetise” as this could mean several things, including, for example, outright sales or swap agreements. Currently, data on gold reserves at the Central Bank of Bolivia is not available after April, so we await more information,” Gopaul said.

Central Bank Demand as a Pillar of Support

Central bank gold demand has been a major pillar of support for the precious metal market in the UK, which has seen lackluster investment demand through most of 2023.

Analysts note that rising bond yields have created a challenging environment for precious metals as they raise the opportunity costs of holding a non-yielding asset.

The headwinds have been acutely felt in recent weeks as 10-year yields have surged to 16-year highs and are currently above 4.7%. This week, the yield on 30-year notes rose to 5% for the first time since 2007, which caused gold prices to fall below $1,900 an ounce.

Investment demand in the world’s largest gold-backed exchange traded product (NYSE: GLD) has also fallen to its lowest level since August 2019 as investors flee the marketplace.

December gold futures are currently testing critical support at $1,830 an ounce. Analysts have said that if this line breaks, prices could fall to $1,800 an ounce.

Central Banks Diversifying Away from the US Dollar

Despite the recent selling pressure, analysts have noted that the gold price is fairly resilient considering where bond yields are. In a recent interview with Kitco News, Colin Cieszynski, chief market strategist at SIA Wealth Management, said that gold prices should be below $1,800 given the current environment.

James Robertson, an analyst at Grant’s Interest Rate Observer, said that central bank demand has completely altered the gold market. He added that he expects central banks to continue buying gold as nations diversify away from the US dollar.

“Gold is the only way central banks in emerging markets can give them independence from the monetary mayhem that is the result of the U.S. dollar,” he said.