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Source: Times Finance Author: Li Yiwen

Gold prices fluctuated frequently at high levels, and the global central bank's gold buying spree also slowed down.

According to the latest data released by the World Gold Council, in the first half of this year, the global central bank's gold reserves increased by 483 tons, a year-on-year increase of 5%, setting a record high for the same period. However, this growth rate is slowing down. Compared with the increase of 290 tons of global central bank gold reserves in the first quarter, in the face of record high gold prices, the global central bank's gold purchases in the second quarter were only 193 tons, a month-on-month decrease of 33%.

Among them, the net purchase of gold by central banks around the world in June was 12 tons, which was up from 10 tons in May, but far lower than 33 tons in April. In fact, compared with the same period last year, both the total purchase and sales of gold by major central banks around the world have declined.

In addition, the gold purchasing actions of emerging market central banks, which were once regarded as the main force in gold purchases, are also diverging.

The People's Bank of China, which had been increasing its gold holdings for 18 consecutive months, stopped increasing its gold reserves after gold prices hit a record high in May this year. After China, India is taking over. According to data from the World Gold Council, the Indian central bank purchased 18.6 tons of gold in the second quarter, of which more than 9 tons of gold were added in June, ranking first among central banks in the world in terms of gold purchases.

From the perspective of gold prices, boosted by the hope of the Federal Reserve's upcoming interest rate cut, the spot gold price has risen to a record high. The current London spot gold price has risen above the $2,500/ounce mark, with an increase of more than 20% since the beginning of the year.

High gold prices have caused some gold consumption to shrink. Data from the World Gold Council shows that demand for gold jewelry, the largest consumer demand for gold, has fallen 19% year-on-year to 391 tons in the second quarter of 2024; retail demand for gold bars and gold coins has fallen 5% year-on-year to 261 tons.

With the current high gold price fluctuations, will the gold buying tide of major central banks slow down further? With the Fed's expectations of rate cuts repeatedly pulled and digested, will gold prices continue to soar in the future?

Central bank gold buying slows

The gold buying craze of major central banks around the world is becoming increasingly polarized. According to the latest gold purchase data for June released by the World Gold Council, seven central banks increased their gold holdings by more than 1 ton that month: India (9.3 tons), Uzbekistan (9.3 tons), Poland (3.7 tons), Qatar (3.1 tons), Jordan (2 tons), the Czech Republic (1.8 tons) and Turkey (1.1 tons).

Among them, India, as a "big gold hoarder", increased its holdings by 37.6 tons in the first half of this year, far exceeding the net increase of 16 tons in the whole of last year, and also exceeding China's increase of 29 tons in the same period, becoming the absolute main force in the current global gold market.

Some central banks that previously increased their gold holdings are now selling off their gold holdings. Singapore, which increased its gold holdings by 10.7 tons for three consecutive months this year, sold off about 12 tons of gold in June alone. Kazakhstan, which was also a major gold buyer in the first quarter, sold off 11.4 tons and 6.3 tons of gold in May and June.

The more significant impact comes from China. In 2023, the People's Bank of China increased its gold holdings by a total of 224.88 tons throughout the year, ranking first in the world and accounting for 21.6% of the global central bank's new gold reserves during the same period. In the first quarter of 2024, the People's Bank of China still increased its gold holdings by 27.1 tons, still ranking among the top in the world.

However, since May, China, previously the world's largest gold buyer, has stopped adding gold reserves without warning. According to the latest official foreign exchange reserve data, as of the end of July, my country's gold reserves were reported at 72.8 million ounces, which was the third consecutive month of flat month-on-month.

"With gold prices fluctuating at high levels, divergence in gold purchasing policies among central banks is inevitable." Liu Shengjun, chief expert of the National Financial Reform Think Tank, told Times Finance that the current international situation is complex and intricate. Although it is a consensus among many emerging market banks to enrich foreign exchange reserves and increase gold holdings to ensure foreign exchange security, different countries or regions face different political and economic environments, and the foreign exchange policies they adopt are also different.

"In the first half of the year, Asian currencies were collectively under pressure, including the Kazakhstan Tenge and the Singapore dollar, which all depreciated to varying degrees. Therefore, it is not ruled out that some countries or regions reduced their gold reserves at a higher level in exchange for US dollar funds and then sold the US dollars to boost their own currency exchange rates. In addition, Kazakhstan is one of the world's major gold producers, and gold accounts for a high proportion of its foreign exchange. Buy low and sell high has always been the norm for the country's central bank." Liu Shengjun said.

As for the unexpected suspension of gold purchases by the People's Bank of China, Tan Yaling, director of the China Foreign Exchange Investment Research Institute, believes that it is mainly due to the need for strategic ambiguity.

Tan Yaling further explained to Times Finance that the main goal of the People's Bank of China's gold purchases is to avoid risks and is not sensitive to gold prices. However, the People's Bank of China's previous continuous gold purchases have attracted great attention from the international market, indirectly stimulating gold speculation and pushing up the cost of gold purchases. The unannounced suspension of purchases is conducive to maintaining strategic ambiguity and avoiding being "sniped" in advance.

Tan Yaling also emphasized that gold currently accounts for a relatively low proportion in China's foreign exchange reserves, and geopolitical conflicts around China are likely to intensify. In the long run, the Chinese central bank's gold buying spree will most likely continue, but continuous and long-term gold purchases may be rare in the future.

In fact, the large-scale gold purchases by the People's Bank of China have always been one of the strong supports for the high price of gold. On June 7, after the People's Bank of China announced the suspension of gold purchases without warning, coupled with multiple factors such as the decline in market expectations for the Fed's interest rate cut, the international gold price once ushered in a round of sharp decline. On the same day, the spot gold price in London fell from US$2,376.11 per ounce to US$2,293.51 per ounce, a drop of 3.45%, the largest drop since the beginning of this year.

However, according to data released by the World Gold Council, as of June this year, the People's Bank of China's gold reserves were 2,264.3 tons. Although the total amount ranks sixth in the world, it only accounts for 4.9% of foreign exchange reserves, ranking last among the top 20 countries in terms of gold reserves.

Gold prices will continue to rise in the medium and long term

Since the beginning of this year, the overall rise in gold prices has been "rapid".

On August 16, Eastern Time, the London spot gold price hit a new record high, breaking through the $2,500 mark and closing at $2,506.96 per ounce, with a year-to-date increase of more than 20%. Even the most watched S&P 500 and Nikkei 225 in the world's major asset classes, their year-to-date increases were only 14.37% and 9.75% respectively, far behind the increase in gold prices.

However, the price of gold at a high level is fluctuating more and more frequently.

Since July, gold prices have shown a "W" trend due to multiple factors such as concerns about the US economic recession and geopolitical conflicts. During this period, gold prices have risen several times and then dropped sharply. Cinda Futures also pointed out in its research report on August 14 that the current 20-day historical volatility percentile of gold prices is higher than 90%, ranking second among all types of assets in the same period, second only to silver.

With prices fluctuating at high levels and the central bank's gold buying spree slowing down, can gold continue to write its "wealth myth"?

In this regard, Song Jiangzhen, a senior researcher at Guangdong Southern Gold Market Research Institute, told Times Finance that the public operations of major central banks often represent their views on the market. At a time when gold prices are already fluctuating at high levels, the current slowdown in central bank gold purchases will, to a certain extent, intensify the wait-and-see mentality of gold investors, and in the short term, gold prices will be affected to a certain extent.

However, Song Jiangzhen also emphasized that as many signs of a US economic recession emerge, the pressure on the Federal Reserve to cut interest rates is increasing. Although the market has conducted "interest rate cut transactions" in advance many times in the past, if the US interest rate cuts officially begin in the future, especially if the exchange rate pressure of non-US countries eases, the gold buying craze will start again, and the gold price will continue to rise in the medium and long term.

Liu Shengjun also believes that although the parties involved in the current Israeli-Palestinian conflict and the Russian-Ukrainian conflict are preparing for possible negotiations, this does not mean that the international situation will slow down in the future. On the contrary, as various thoughts spread around the world, conflicts between some regions are difficult to coordinate, and the risk of geopolitical conflicts in the future will only increase. In the medium and long term, this will provide great benefits for gold, which has a safe-haven attribute.

In fact, judging from the inflation data, which is the most critical factor affecting the Fed’s interest rate cut, the U.S.CPIIt was 2.9%, a 0.1 percentage point narrower increase from June. Although it was still higher than the 2% long-term inflation target set by the Federal Reserve, this was the first time that U.S. inflation has returned to the "20s" since March 2021.

Signs of continued slowdown in inflation provide room for the Fed to cut interest rates. The president of the Federal Reserve Bank of St. Louis said that inflation seems to have returned to the 2% track, and the tight job market no longer poses an upside risk to inflation, and the time to adjust interest rates may be approaching.

This has further intensified the market's bets on the Fed's interest rate cuts. The CME Fed Watch tool shows that the probability of a 25 basis point rate cut in September has risen to 74%.

In addition, the possibility of continued escalation of global geopolitical risks also provides a possibility for gold to be included in the reserve allocation of major central banks. According to the latest survey released by the World Gold Council, 29% of the 70 central banks surveyed plan to increase their gold reserves in the next 12 months, the highest level since the survey was launched in 2018.

Another byUBSThe survey released by Asset Management also showed that among the 40 central banks surveyed worldwide, more than 70% regarded "the continued escalation of global geopolitical risks" as a concern for asset allocation.