As gold climbs toward a record, some of last year’s biggest buyers are finally pulling back.
(Bloomberg) — As gold climbs toward a record, some of last year’s biggest buyers are finally pulling back.
Gold demand from central banks fell to 228.4 tons in the first quarter, down 40% from the preceding three months, according to a report from the World Gold Council. While that’s still strong, it’s the second straight quarter of decline, a sign the institutions’ historic bullion binge may be coming to an end.
Record central bank buying — which accounted for a nearly a quarter of global gold demand last year — underpinned bullion as it came under pressure from the Federal Reserve’s most aggressive tightening cycle in decades. Prices withstood sustained investor selling despite a surge in the dollar and bond yields, their two biggest drivers.
Now gold is now within touching distance of its all-time high of $2,075.47 an ounce amid banking sector turmoil and increasing bets the Fed will start cutting interest rates later this year. That dynamic might unwind should central bank demand falter and a more buoyant US economy forestall monetary loosening.
The metal declined 0.5% on Friday to $2040.19 an ounce by 9:04 a.m in London, but remains on track for its biggest weekly gain in almost two months. Traders are awaiting US nonfarm payrolls for a comprehensive gauge of the strength of the labor market.
A drop in central bank buying “would reduce the put under the market, thereby making the market less robust to absorb price adverse developments,” said Ole Hansen, head of commodities strategy at Saxo Bank A/S. “Last year, the central bank put most likely prevented prices from falling despite the surging dollar and yields.”
To be sure, it’s unclear whether central bank buying will continue to fall back to the lower levels seen during the last decade. The need for alternative assets to the dollar and euro was highlighted by the sanctioning of the the Bank of Russia’s reserves last year, which left it with only its bullion and yuan stockpiles.
About half of central bank buying last quarter was disclosed by the institutions, according to the WGC, with the Monetary Authority of Singapore making the biggest single purchase of 69 tons. The voracious buying last year was largely driven by unidentified institutions, sparking speculation about the mystery whales in the market.
Demand for jewelry — which supported gold last year — also declined last quarter, driven by a sharp reduction in India’s consumption as prices surged. Buying in one of the world’s top consumer markets is likely to remain muted this year with local prices at a record, said P.R. Somasundaram, regional chief executive officer in India for the WGC.
By contrast, buying by Chinese consumers — accounting for over 40% of the global jewelry purchases — surged as Covid-19 restrictions were eased. The Lunar New Year also helped draw many consumers to gold as an investment, with demand for bars and coins jumping 8% from the previous quarter to 66 tons.
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