Gold is on the rise again, as a confluence of economic and political dynamics spurs demand from investors around the world, especially one cohort: central banks.
After stalling around US$4,000 an ounce for several weeks, bullion as jumped around US$400, or 10 per cent, since the start of August and could be on track for its best month this century. The last time it rose 13 per cent or more in a month was September 1999.
There have been a few key U.S.-related triggers for the spike, namely the Federal Reserve’s “dovish hold” on interest rates, weak employment data, and fairly tame inflation figures. These have all tempered Fed rate hike expectations and dragged down the dollar — manna for gold.
But they come against a more unnerving geopolitical and policy backdrop that has reminded the world of gold’s underlying appeal, particularly for reserve managers.
The U.S.-Iran war has re-escalated, and hopes of a peace “deal” — however unsatisfactory that deal might be — are evaporating. U.S. President Donald Trump’s off-ramp ahead of November’s midterm elections is narrowing. Escalation or capitulation is not the only choices Trump faces, but it is a black-and-white scenario some analysts are now beginning to contemplate.
Meanwhile, doubts about the Fed’s independence and Chair Kevin Warsh’s inflation-fighting credibility are growing. Investors weren’t impressed by his remarks in July about the central bank’s 2-per-cent inflation goal. Furthermore, media reports suggest Trump has repeatedly called Warsh since his appointment, and Trump has revived his attempts to fire Governor Lisa Cook.
All this has unnerved the bond market. Yields on the benchmark 10-year Treasury note have climbed to their highest level in 18 months, while yields on 30-year bonds and 30-year inflation-protected bonds are at their highest since 2007 and 2008, respectively. Little wonder, perhaps, that central banks have continued to reduce their Treasuries held in custody at the New York Fed. These are the lowest since 2012.
“The U.S. is now in a phase where its global seignorage benefits of supplying the world’s reserve currency have now been exhausted; the next phase (which may already be underway) is what happens when the foreign official holders of your liabilities become more antsy about holding them,” economist Phil Suttle wrote last week.
None of these events on their own would necessarily spark a huge revival in gold. But throw them all together, and it’s a pretty compelling checklist. Especially for central banks, which had already started to ramp up their purchases in the second quarter after a lackluster first quarter.
Net purchases by central banks in the April-June period totaled 289 tons, more than five times the volume of the prior three months, according to the World Gold Council. This was a record high for a second quarter.
Taking the average price into account, analysts at Deutsche Bank estimate second-quarter central bank demand was a record US$45 billion.
That record may be broken soon. A WGC survey of central banks in June showed that a record 45 per cent of respondents plan to increase their gold holdings over the next 12 months. Initial hard numbers appear to back that up. China’s central bank bought a net 20 metric tons in July, a rise of 0.9 per cent from the previous month. That was the biggest increase, by both measures, since October 2023, lifting its total gold reserves to a record 2,377.5 tons.
“China is again adding materially to its reserves. Gold is not a pure Fed signal, but persistent official-sector demand and renewed investor interest are reinforcing the value of inflation, currency and geopolitical hedges,” BNY analysts wrote last week.
But central banks move slowly, and a clear picture of their reacquaintance with bullion won’t emerge for some months. It probably won’t be a one-way street either. After the unprecedented price volatility of the last couple of years, gold is no longer the ultimate safe-haven asset it was long thought to be, even for central banks, the most conservative, price-insensitive buyers with the longest investment horizons.
An International Monetary Fund paper last month found that gold is “highly volatile, offers only conditional hedging and diversification benefits,” and shouldn’t be bought for liquidity purposes.
“Central banks should treat gold as a high-risk reserve asset and anchor gold accumulation decisions in strategic asset allocation and sound policy analysis,” the authors said.
Central banks are unlikely to chase the rally blindly. But as confidence in the world’s reserve assets frays, gold’s allure is unlikely to dim.