A recent rebound in central bank gold purchases may strengthen forecasts that gold prices will continue to rise into next year, with Goldman Sachs now predicting the price could hit $3,000/oz by year-end.
The price of gold has gained nearly 50% over the past two years, driven largely by safe-haven demand from the world’s central banks. However, after reaching record highs in 2022 and 2023, central bank purchases began slowing at the start of this year, dropping to a low of less than 25 tonnes in August.
Despite gold’s hitting multiple record highs in the month leading up to US election, a recent report by the World Gold Council (WGC) found the world’s central banks purchased more bullion in October than in any month this year, suggesting demand for the metal has recovered.
“While rising gold prices appear to have inhibited some buying and prompted tactical sales over recent months, October’s rebound in reported activity signals continued interest from central banks to accumulate gold within their reserve portfolio,” said the WGC.
“This reaffirms the role gold plays as a strategic asset for central banks to manage risks and diversify reserves,” it said, echoing remarks made in June, that an increasingly complex geopolitical and financial environment had made gold reserves management “more relevant than ever” for central banks.
A survey conducted by the group in the first few months of this year found that 29% of central banks intended to increase their gold reserves in the next 12 months — “the highest level we have observed since we began this survey in 2018”, it said.
The planned purchases were largely motivated by concerns around rising inflation and higher crisis risk, with rising geopolitical tensions in Russia, Ukraine and the Middle East fuelling demand for the safe-haven asset.
In early 2022, central bank gold buying surged after Russia’s invasion of Ukraine, which saw the US Federal Reserve freezing the assets of the aggressor’s central bank.
“That was a wake-up call for central banks worldwide,” said Goldman Sachs commodity strategist Lina Thomas in a note last week. “They began to diversify their reserves away from the dollar and into an asset no-one can freeze — and that is gold.”
As a result, central bank gold buying reached 1,082t in 2022, the highest annual purchase recorded in history. The second highest reading came one year later, with net inflows recorded at 1,037t last year.
While gold already makes up a large chunk of central bank reserves in developed economies, accounting for 70% of reserves in the US, France, Germany and Italy, emerging markets hold relatively smaller shares, with China reporting 5% of its reserves in bullion.
“Seen that way, some central banks in emerging markets are catching up to their counterparts in developed countries,” said Goldman Sachs in October.
In line with this, emerging markets continued to drive the increase in central bank buying this year, with India’s reserve bank in the lead, followed by that of Turkey and Poland. Put together, these three central banks account for 60% of total gold purchases this year to date.
For many central banks, US Treasury bonds account for most of their reserves. However, Goldman Sachs said the country’s debt burden is making policymakers increasingly worried about their exposure to the US, with gold serving as an attractive alternative.
Thanks to robust central bank demand, the gold price has gained nearly 50% since early 2022, rising even while the Fed hiked interest rates. Typically, higher rates make gold less attractive than interest-paying assets like bonds, but this relationship has changed dramatically since early 2022, said Thomas.
“We don’t see central bank demand slowing down,” said Thomas, “and with the Fed cutting rates, investors are jumping back in too.” Goldman Sachs estimates that 100 tonnes of physical demand lifts gold prices by at least 2.4%.
As a result, Thomas forecasts gold will rise to $3,000/oz by the end of next year, buoyed by falling interest rates and resilient central bank demand. Both UBS and Goldman Sachs have now raised their gold price forecasts, with UBS last month predicting a price of $2,900/oz by the end of next year.
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