Gold’s appeal is that it is unaffected by sanctions
Gold is currently experiencing a surge in popularity. Geopolitical hedging by global central banks may contribute to its continued shine.
Currently reaching its highest level ever, surpassing $2,400 per troy ounce, the remarkable strength of gold cannot be solely attributed to general concerns about the world. Following the death of Iran’s president this week, the yellow metal received a significant boost. However, over the past two years, it has been on a remarkable upward trend, appreciating by 33% since the end of 2022.
The rally has managed to overcome certain usual obstacles. Prices have increased significantly this year, despite the fact that real interest rates have also risen. In 2024, there has been an increase of approximately 0.37 percentage point in yields on 10-year U.S. inflation-protected Treasury securities. Gold tends to move in the opposite direction of real yields because it does not generate any income. When real rates are higher, it becomes less attractive to hold.
Despite the occurrence of Americans purchasing small gold bars at Costco, retail investment demand for gold has not offered significant support either. Gold-backed exchange-traded funds have experienced net outflows for three consecutive years.
Who are the major players driving the surge in gold prices? Global central banks, particularly those in emerging markets. According to the World Gold Council, central banks have acquired approximately 2,200 tons of the metal since the third quarter of 2022. This translates to an increase of nearly $170 billion at current prices. Central bank net purchases currently make up over 20% of global gold demand, which is double the proportion seen between 2012 and 2021.
What could potentially set it off? Following Russia’s invasion of Ukraine in 2022, certain central banks may have been motivated to diversify their holdings away from assets denominated in dollars, possibly in response to Western sanctions. Russia’s international reserves, valued at around $300 billion, have been subject to freezing. There has been discussion regarding the potential utilization of their income to support the defense or reconstruction efforts in Ukraine. Gold has played a significant role in Russia’s reserves, both before and particularly after the invasion. It is a valuable asset that can be easily stockpiled, ensuring it remains out of reach for foreigners.
According to Goldman Sachs, the majority of gold buying from central banks goes unreported. However, a select few central banks, such as China, India, and Turkey, have been responsible for all the net buying since mid-2022.
China’s central bank has been consistently purchasing gold for the past 18 months, starting from November 2022. This has resulted in a significant increase in its gold reserves, which have grown by 16% or 10 million troy ounces. China’s economy holds a significantly greater global significance compared to Russia’s in 2022. This would pose challenges in imposing sanctions if China were to invade Taiwan. A potential military confrontation with the United States would have significant implications.
It is evident that China cannot transfer its entire $3.4 trillion in reserves to bullion. However, if China were to increase its investment in gold, it could have a substantial impact on the market. Gold made up nearly 5% of China’s total reserves as of April, which marked an increase from approximately 3% in 2022. If China were to increase its allocation of reserves into gold by just 1%, it would amount to approximately 9% of the total global supply from last year, based on current prices.
The continuous geopolitical tensions between China and the West are likely to bring satisfaction to those who closely follow the gold market.
