Gold Investor Demand Reaches Over Ten-Year High With Central Bank Purchases Leading the Movement, According to JPMorgan

With central bank gold demand continuing at record-high rates, investors are following suit. JPMorgan, a U.S.-based global bank and financial services firm, estimates gold accumulation has reached the highest level since 2012. After a record-breaking gold-buying year from central banks in 2022, gold demand continues to reach new highs as we progress through the second half of 2023.

Central banks began their fixation on increasing gold reserves at the start of 2022, likely because of the global economy’s dwindling conditions. While gold trading may not have increased at the same rate as central bank demand, exposure rates tell a different story. According to JPMorgan, the estimated exposure to gold has increased to the highest level in over a decade.

“In other words, investors’ allocation to gold looks rather high by historical standards at the moment, and one needs to assume a structural increase in central bank demand beyond historical norms (due to fear of sanctions or general diversification away from G7 government bonds) to be bullish on gold,” JPMorgan explained in a note.

After Russia’s invasion of Ukraine at the beginning of 2022, central banks around the globe began stockpiling gold reserves in an attempt to devalue the U.S. dollar. The de-dollarization trend gained momentum as more nations hopped on the bandwagon of becoming less dependent on the powerful currency. De-dollarization, in theory, would allow forming economies to become more self-reliant.

The weaponization of the dollar against Russia also acted as a critical red flag to other nations relying on the U.S. dollar. The staple currency around the globe wouldn’t be so stable anymore if more nations continued devaluing it.

The de-dollarization trend that sparked at the beginning of 2022 created a critical position for gold. Nations needed to choose a stable, universal asset to replace the U.S. dollar with when filling reserves. That asset of choice became gold.

Over the last 22 months, central banks around the globe stockpiled gold to reduce their reliance on the U.S. dollar. As a side effect, gold enjoyed excellent performance support, and traders saw the asset as an attractive investment opportunity.

If nations continue moving toward gold and away from the U.S. dollar, gold appears as an attractive investment opportunity.

In the first quarter of 2023, central banks purchased 228.4 tons of gold, breaking the record for the most tons of gold purchased in the first quarter of any year, including 2022. 2023’s record-breaking first quarter signified a 176% increase from the first quarter of last year. At this remarkable pace, central banks started the year off, ready to break 2022’s record for the highest net purchases of gold on record.

Despite this excellent momentum, JPMorgan is unsure whether central banks will continue this pace. During the second quarter of 2023, buying slowed down to a more regularized pace of 100 tons. The slowdown was largely due to turmoil occurring in Turkey, causing an enormous selloff that offset the total net figure.

Whether or not the central bank gold buying trend will continue is still unclear. A survey by the World Gold Council showed that 62% of central banks plan on increasing their gold reserves within the next five years.

Regardless of what occurs, the increased bank demand has restored a balance between gold prices and bond yields. The increase in central bank demand allowed gold prices to spike beyond what ten-year Treasury yields typically allow.

“While before the pandemic, gold ETF flows was the demand component exhibiting the highest correlation with gold prices, and thus the most important flow to watch, after the pandemic, it has been central bank flows showing the highest correlation with gold,” JPMorgan explained.

If a slowdown occurs in central bank gold-buying, it won’t be in the near future. As of August, China continued its ten-month gold-buying streak, lifting its reserves to over 2,175 tons of gold. Poland is also still on its shopping spree that began in June, hoping to purchase around 100 tons of gold.

“The rationale to increase gold holdings, therefore, comes as no surprise since ‘interest rate levels,’ ‘inflation concerns,’ and ‘geopolitical risks’ continue to be the leading factors in central bankers’ reserve management decisions as they were last year,” the World Gold Council explained.

Considering the factors behind the increase in central bank gold demand, the levels will likely persist, at least in the short term. As always, investors should consult their financial advisors before making any portfolio decisions.

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