Gold demand reaches decade high after ‘colossal’ central bank purchases

Annual demand for gold soared by 18% last year, the most since 2011

Gold demand reaches decade high after ‘colossal’ central bank purchases

Spurred by "colossal" central bank purchases that highlighted the asset's allure as a safe haven amid periods of global unrest, the demand for gold soared to its greatest level in more than a decade in 2022. Despite expectations it would be difficult to match last year's purchases due to a slowdown in overall reserve growth, Krishan Gopaul, senior analyst at the WGC, told the Financial Times said "colossal" central bank buying is a "huge positive for the gold market.

“Since 2010, central banks have been net purchasers of gold following two decades of net sales. What we have seen recently in this environment is that central banks have accelerated their purchases to a multi-decade high,” he said. In comparison to currencies controlled by other governments, the metal, he added, has a lower "counterparty risk," which is a major draw for central banks.

The World Gold Council, a group endorsed by the industry, reports that global central bank purchases reached a 55-year high last year, driving a 18% increase in annual gold demand to 4,741 tonnes, the highest level since 2011.

After the US froze Russia's dollar-denominated deposits as part of its sanctions against Moscow, central banks swooped up gold at a historically high pace in the second half of the year. Many observers link this behaviour to a desire to diversify reserves away from the dollar. To save themselves against excessive inflation, retail investors also poured money into the previous metal.

In the last three months of the year, central banks bought 417 tonnes of gold, approximately 12 times more than in the corresponding period the previous year. It increased the yearly total to 1,136 tonnes, more than double what it was the year before.

The IMF was only informed of around 25% of the fourth quarter's central bank purchases.

Turkey reported importing about 400 tonnes in 2022, followed by Middle Eastern countries and China, which reported purchasing 62 tonnes in November and December. The remaining amount, according to the majority of gold industry analysts, is accounted for by central banks and governments in China, Russia, and the Middle East, which may also include sovereign wealth funds.

"Portfolio diversification is the main reason" for US dollar-heavy central banks purchasing gold, according to James Steel, a seasoned precious metals analyst at HSBC. The fact that central banks are constrained in the assets they can retain and could be hesitant to commit to other currencies, he continues, is a major factor in the decision to choose gold.

Since rising interest rates caused $3 billion in withdrawals from gold-backed exchange-traded funds over the course of the year, gold prices have fallen from a record high above $2,000 per troy ounce in March of last year to just around $1,600 per troy ounce in November. As gold has no yield, investors find it less appealing as interest rates on low-risk bonds rise.

Demand from central banks and small-scale investors, however, prevented the previous metal from falling any lower and prepared the ground for a strong rise since November. The US Federal Reserve's indication that it will halt the pace of rate hikes has helped gold increase by about a fifth in those three months to $1,928 per troy ounce, which is its highest level in nine months. While declining inflation may dampen demand for bars and coins, the WGC anticipates a recovery in institutional investor demand for gold this year as interest rates in major nations near their high.

UBS increased its year-end prediction for the precious metal to $2,100 per troy ounce from $1,850 earlier due to strong central bank purchasing and an anticipated return of inflows for gold-backed ETFs.