Central banks around the world have been hoarding gold reserves furiously, as last seen 55 years ago when the US dollar was still trailing gold. According to the World Gold Council (WGC), central banks bought a record amount of 399 tons of gold worth around $20 billion in the third quarter of 2022, with global demand for the precious metal returning to pre-pandemic levels. Retail sales by jewelers and buyers of gold bars and coins were also strong, the WGC said in its latest quarterly report. According to the WGC, world gold demand was 1,181 tons in the September quarter, which means an annual growth of 28%. According to the WGC, the biggest buyers were the central banks of Turkey, Uzbekistan, Qatar and India, although other central banks also bought significant amounts of gold but did not publicly announce their purchases. Turkey’s central bank remains the biggest reported buyer of gold this year, adding 31 tonnes in the third quarter to bring its gold holdings to 489 tonnes. The Central Bank of Uzbekistan bought another 26 tons; The Central Bank of Qatar bought 15 tonnes; The Reserve Bank of India added 17 tonnes during the quarter, taking gold reserves to 785 tonnes.
Retail buyers of gold bars and coins in Turkey also grew to 46.8 tons in the quarter, which is more than 300% more than a year ago.
This development is hardly surprising given that despite the emergence of cryptocurrencies such as bitcoin, gold is still considered the most important safe-haven asset in times of uncertainty or turmoil. Gold is also considered an effective hedge against inflation, although experts say this is only true over the long term, measured in decades or even centuries.
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Unfortunately, rising interest rates spoiled the gold bulls’ festivities as exchange-traded funds (ETFs) stockpiled bullion coins for investors, who became net sellers. In fact, bullion unloading by ETFs countered central bank purchases, sending gold prices down 8% in the third quarter. Gold is a non-interest-bearing asset, and investors tend to shift their money to higher-yielding instruments when interest rates rise. An overly strong dollar hasn’t helped gold (and commodity) prices either. Gold is down 9.3% year-to-date and nearly 20% below its March peak of $2,050 an ounce.
Gold spot prices (USD per ounce)
Source: Business Insider
A long-term rise
Fortunately for the gold bulls, the long-term outlook for gold seems to be tilting to the upside. The market is currently in the midst of a fourth consecutive 75 basis point increase, after which the Federal Reserve is expected to announce that it could reduce the size of its rate hike starts right away in December.
“We think they just wander to get to the end point. We think they will raise with 75. We believe that they open the door to a decrease in interest rate hikes starting in December. The November meeting is definitely not about November. It’s about Christmas” Michael Gapen, Bank of America’s chief economist, has told CNBC. Gapen expects the Fed to raise interest rates by half a percentage point in December.
While US inflation has remained stubbornly high, there are growing signs that high interest rates are starting to slow the economy as the housing market slumps and some mortgage rates nearly double. This assumes that the Fed has gone easy on its aggressive hikes.
Gold traders seem to agree that the long-term trend for gold is up.
According to a survey of the precious metals industry, the price of gold will rise next year despite higher interest rates. Traders expect prices to rise to $1,830.50 an ounce by this time next year, nearly 11% above current levels.
“I’m inclined to think that the Fed’s hawkishness is largely “priced in” now. However, the possibilities for a rapid increase in the price of gold in the near term are very limited, even if interest rates rise and the US dollar remains strong, “Philip Klapwijk, managing director of Hong Kong-based consultancy Precious Metals Insights Ltd, said in an email.
Finay, a weaker dollar is likely to improve the outlook for gold. The dollar may finally be losing its luster after a long period of relative strength against other major currencies. The dollar index — a gauge that compares the U.S. dollar to six leading currencies — recently fell to multi-month lows. According to Wells Fargo, the dollar’s gains are likely to continue this year as interest rates continue to rise, but Fed rate cuts in 2023 should push the dollar into a “cyclical decline.” In other words, the dollar is set to fall 2023 when the US enters recession and the Fed cuts interest rates.
By Alex Kimani for Oilprice.com
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