Central banks around the world purchased approximately USD$8 trillion worth of gold in August, which marks the lowest amount since March, according to a new report from the World Gold Council.
The council released its monthly gold report on Tuesday showing gold at a crossroads of economic indicators, geopolitical risks and market dynamics.
While the immediate future might hold corrections, the strategic importance of gold in both investor portfolios and central bank reserves remains undisputed, potentially setting the stage for gold to continue its shine, albeit with bouts of volatility.
The global economic landscape wavers between recovery and uncertainty. Although unemployment remains low in key economies like the US, the factors that once supported robust economic health are fading.
Persistent inflation and aggressive monetary policies by central banks, such as the Federal Reserve, could lead to economic slowdowns or “hard landings,” potentially boosting gold’s appeal as a hedge. However, the strengthening US dollar and rising interest rates may offset some of gold’s attractiveness, as reflected in recent market trends.
The World Gold Council report noted that although overall demand has tapered from the highs of early 2024, the accumulation of gold reserves continues to grow, with activity concentrated in emerging market (EM) central banks. In August, net purchases hit their lowest level since March, when central banks reported a net sale of USD$2 trillion. This figure also fell well below the 12-month average of USD$33 trillion.
Year-to-date, EM central banks have accounted for 70 per cent of total reported net purchases, with Turkey making up 25 per cent of overall central bank buying so far.
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Gold price not primary driver for central bank purchases
Central bank activity in August slowed significantly.
While gold’s price performance is not the primary strategic driver for central bank purchases, its steady upward trend may have contributed to the slowdown. However, sales have not increased, suggesting that central banks may be adopting a wait-and-see approach rather than signalling a shift in trend.
All other key factors driving central bank decisions, such as the need for effective diversifiers and gold’s strong performance during periods of risk, remain unchanged.
In August, four central banks increased their gold reserves by a tonne or more.
The National Bank of Poland added a net 6 tonnes and raising its total holdings to 398 tonnes.
Poland came in second with three tonnes during this period, raising its total to 39 tonnes during this period, marking its fifteenth consecutive month of net purchases.
Year-to-date, Turkey remains the largest net purchaser, having acquired 52 tonnes of gold, which now makes up about 35 per cent of its total reserves.
The Reserve Bank of India also added 3 tonnes, its eighth consecutive month of net buying, making it the second-highest net purchaser on a year-to-date basis with 45 tonnes.
Furthermore, the Czech National Bank increased its holdings by 2 tonnes, continuing its streak of eighteen consecutive months of net buying, bringing its total to 45 tonnes after accumulating 33 tonnes over this period.
In contrast, the Central Bank of Kazakhstan reduced its gold reserves by 5 tonnes in August, marking the fourth consecutive month of net sales. Kazakhstan’s gold holdings now stand at 290 tonnes.
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Downstream effects produce mixed results
The 2024 World Gold Council outlook depends on several factors, including the direction of interest rates, geopolitical conflict outcomes, and economic recovery trends. The council highlights that current gold prices reflect market expectations for the latter half of 2024, and any major deviation from these expectations could trigger further price movements.
For example, ongoing conflicts in the Middle East have added volatility to the gold market.
These tensions typically enhance gold’s safe-haven appeal, but the market has seen profit-taking after significant spikes. Discussions on social media and analyses from financial experts suggest that while gold has gained from these conflicts, the momentum may not continue without further escalation or new geopolitical developments.
Market analyses from firms like Goldman Sachs reveal mixed sentiment. Gold has hit impressive highs, reaching around USD$2,670 due to safe-haven demand. However, signs of overbought conditions suggest potential corrections.
These developments also have significant downstream effects on industries otherwise adjacent to gold.
For example, higher gold prices have impacts on the gold mining sector. Companies benefit from increased revenues as they sell at elevated market rates, boosting their profitability, especially for those with lower operating costs.
This encourages exploration and development as miners seek to capitalize on rising prices, leading to the expansion of operations and the development of previously unprofitable sites.
This price environment also encourages mergers and acquisitions, with larger companies acquiring smaller firms or exploration projects to secure long-term production.
Some of the big name acquisitions from this year include Newmont Corporation (TSE: NGT) (NYSE: NEM) acquiring Newcrest Mining, and Calibre Mining Corp (TSE: CXB) (OTCMKTS: CXBMF) and its expansion into Newfoundland with the acquisition of Marathon Gold.
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