As economies around the globe face uncharted levels of uncertainty, one thing remains consistent: China continues to buy gold. For the seventh straight month in a row, the nation’s central bank added more gold to its reserves as a strategy to combat the U.S. dollar as the world’s top currency. According to the People’s Bank of China’s updated reserve data, the nation purchased just around 16 tons of gold in May of 2023.
With last month’s purchase, China’s gold reserves now total at 2,092 tons. The nation started its most recent seven-month gold shopping spree in November 2022 and has since added 144 tons of gold to its reserves.
Since 2022, particularly the last quarter, central bank demand has transformed the gold market. Typically central bank gold buying is just a small sector of the precious metal’s demand categories. Last year, however, everything shifted. In 2022, central banks purchased more gold than in the last 50 years.
In the third quarter of 2022, central bank gold purchases accounted for 34% of all gold demand. In that period, central banks purchased 399 tons. The figure only increased in the fourth quarter to 417 tons. By the end of the year, central banks had purchased a total of 1,136 tons of gold.
In the beginning of 2023, demand from central banks continued at the same rate. By the end of the first quarter, nations purchased 228 tons, breaking the previous first-quarter purchase record in 2013 by 35%.
“Central bank gold buying made a blistering start to 2023. Q1 demand reached 228t. While lower than the figures seen in the previous two quarters this is nonetheless the strongest first quarter on record,” the World Gold Council explained in its quarterly report.
Central bank demand now provides critical support to gold prices. With unpredictable actions from the Federal Reserve, soaring inflation rates, failing financial institutions, crumbling job sector reports, and endless other factors weighing on all asset classes, central bank demand acts as gold’s backbone in a failing economy. Nations continue buying more gold as a safe-haven investment while other currencies only continue to lose value.
Tavi Costa, a portfolio manager at Crescat Capital, explained in an interview with Kitco News that he believes gold demand from central banks should persist for the foreseeable future.
“Escalating geopolitical conflict has increased the importance of owning a neutral asset with no counterparty risk that also carries centuries of credible history as a haven. Gold is the only asset that qualifies,” Costa stated.
In the 1970s, gold typically accounted for around 40% of central bank reserves. Today, that average sits only slightly above 15%, which may be above recent years, though still dramatically below where it could be. If nations continue purchasing at this elevated rate and reserves reach the gold levels that they were at 50 years ago, the precious metals market would gain $3.2 trillion.
“It can’t be stated enough how transformative central bank demand has been for the gold market,” Costa continued.
Analysts predict another strong year of gold buying from central banks, even if it doesn’t edge out last year’s record figures. Every year, the World Gold Council conducts a Central Bank Gold Reserves Survey. Last month, the results showed that 24% of survey responders plan to stockpile more gold in the next year.
“Gold’s ‘historical position’ continues to be the top reason for central banks to hold gold, with 77% of respondents saying that it is highly relevant or somewhat relevant,” the survey noted. Other reasons that central banks are buying gold include gold’s performance during times of crisis, gold’s long-term store of value and use as an inflation hedge, gold as a portfolio diversifier, and that gold carries no risk of default.
In the first quarter of 2023, China purchased 57.85 tons of gold, though it hasn’t been 2023’s biggest buyer on record. Singapore ranked number one in Q1 with a total of 68.67 tons of gold purchased. Other notable buyers included Turkey purchasing 30.21 tons during the quarter, India at 7.21 tons, and the Czech Republic at 1.54 tons.
“This is all the more impressive considering it follows the record-breaking pace of demand last year. The rolling four-quarter total jumped significantly to 1,224t in Q1 following massive buying in recent quarters. As with the figures for both Q3 and Q4 2022, data for the current quarter contains a significant estimate for unreported activity,” the World Gold Council concluded in its quarterly report.
As pessimism toward the U.S. dollar increases and China’s gold-buying spree continues, we can expect to see nations continuing their efforts to prioritize gold holdings.