Is this round of gold new highs bought by central banks around the world?

Guosheng Securities Bear Garden, Mu Renwen

Guosheng Securities believes that the correlation between central bank purchases of gold and gold prices is unstable, and there was no significant increase in global central bank gold reserves in March, so central banks may not be the core factor in the recent rise in gold prices. Looking back, under the influence of monetary overissuance and geopolitics, the central bank's purchase of gold may still be a major trend.

What happened: the recent US employment and inflation data exceeded expectations, but the price of gold continued to rise, constantly setting new record highs.

Core conclusion: the recent gold price trend deviates from the fundamentals, and the market speculates that the central bank's purchase of gold under the background of "de-dollarization" is one of the main reasons.Abeltr23reelIn our study, we found that: 1) the demand for gold purchased by central banks fluctuates greatly, and the proportion of total demand has indeed increased significantly in the past two years; 2) the correlation between central bank gold purchases and gold prices is unstable, and the global central bank gold reserves did not increase significantly in March, so central banks may not be the core factor in the recent rise in gold prices. 3) "de-dollarization" should not be the main reason for central banks' gold purchases in recent years, but is more likely to be driven by factors such as risk aversion and hedging demand. Looking back, under the influence of monetary overissuance and geopolitics, the central bank's purchase of gold may still be a major trend. Continue to prompt: under the disturbance of trading factors, short-term gold prices may have a correction risk, but the year as a whole is still on the high side.

1. In the near future, the trend of gold price deviates obviously from the fundamentals, and there are many explanations of "grand narrative". The purchase of gold by central banks is one of them.

2. From a structural point of view, the gold demand of central banks fluctuates greatly, accounting for 5% of the total demand, accounting for 25% of the total demand, but it has risen significantly in the past two years and now accounts for about 23%.

3. From the point of view of the reasons, there are four main considerations for the central bank to buy gold:

As a general equivalent in the world, gold can be directly used for international trade payment and debt payment when foreign exchange reserves are insufficient or restricted.

As a reserve asset with physical value, gold can enhance the credit of sovereign currencies and is conducive to the internationalization of sovereign currencies.

The value of gold is stable, and the demand for gold allocation has increased under the background of excessive issuance of global currencies and excessive liquidity.

From a multi-point of view, "de-dollarization" may not be the core driver of central bank gold purchases in recent years.

4. At present, although the scale of gold purchases by central banks is high and the structural characteristics are obvious, there has been no significant increase since March. In other words, central banks may not be the core factor driving the sustained rise in gold prices this round.

5. Looking back, given the background of increased geopolitical uncertainties and superimposed currency overissuance, the central bank's purchase of gold may still be a major trend.

Continue to hint: under the disturbance of trading factors, short-term gold price fluctuations may be amplified, and there may be a correction risk, but the year as a whole is still on the high side.

Text of the report:

1. In the near future, the trend of gold price deviates obviously from the fundamentals, and there are many explanations of "grand narrative". The purchase of gold by central banks is one of them.

The price of gold has continued to rise since March, especially after March 23, most of the economic data released by the United States performed well, the yields of US debt and TIPS continued to rise, and the dollar index rose first and then fell, with little change as a whole, but gold opened a new wave of rise after short-term consolidation and continued to hit record highs, which deviated significantly from the fundamentals. In the face of the deviation between the gold price and the fundamentals, there are many "grand narrative" explanations in the market, among which the central bank's purchase of gold as a reserve asset to push up the gold price is one of the mainstream explanations.

2. From a structural point of view, the gold demand of central banks fluctuates greatly, accounting for 5% of the total demand, accounting for 25% of the total demand, but it has risen significantly in the past two years and now accounts for about 23%.

According to the use, gold is mainly divided into four directions: gold jewelry manufacturing, science and technology, investment and central bank demand, in which gold jewelry manufacturing and technology demand is relatively stable, investment and central bank gold demand fluctuate. In the past two years, the proportion of gold purchased by central banks in the demand structure has increased significantly. The global demand for gold in 2023 is 4448 tons, of which the demand from central banks and other institutions is 1037 tons, accounting for 23%.Abeltr23reel.3 per cent, more than 20 per cent for two consecutive years (23 per cent in 2022), compared with less than 15 per cent in 2010-2021.

3. From the point of view of the reasons, there are four main considerations for the central bank to buy gold.

As a general equivalent in the world, gold can be directly used for international trade payment and debt payment when foreign exchange reserves are insufficient or restricted. There are two more typical cases: one is Venezuela, whose oil revenue is almost all the source of foreign exchange income, but since 2015, international oil prices have fallen sharply, foreign exchange reserves have contracted rapidly, and 172 tons of gold have been used to repay international debts and balance domestic payments. Second, Russia. After the outbreak of the Crimean incident in 2014, the relevant sanctions imposed by Western countries on Russia increased significantly. In response to financial sanctions, the Russian Central Bank accelerated its gold reserves. At present, the gold reserves of the Russian Central Bank reached 2329.6 tons, an increase of 1295 tons over 2014, accounting for 28.1% of its foreign exchange reserves, up from 8.4% in 2014.

As a reserve asset with physical value, gold can enhance the credit of sovereign currencies and is conducive to the internationalization of sovereign currencies. As a reserve asset with physical value, gold can be used as the basis for the issuance of central bank currency, which can enhance the credit of sovereign currencies. Behind the modern monetary credit system is the endorsement of national credit. when the economy is impacted or the global political environment deteriorates, national credit may be affected and the credit of sovereign currencies may decline. the support of gold can increase the credit of sovereign currencies, which is conducive to the international development of sovereign currencies.

The value of gold is stable, and the demand for gold allocation has increased under the background of excessive issuance of global currencies and excessive liquidity. In retrospect, the speed of central bank expansion in developed countries accelerated significantly after the 2008 financial crisis, and further accelerated after 2020. In the US, for example, the latest assets of US deposit-taking institutions reached $7.49 trillion, up 78 per cent from the end of 2019 and 229 per cent from the end of 2008. In the context of currency overissuance, on the one hand, developed countries need to increase their holdings of gold to enhance the credit of their sovereign currencies; on the other hand, the devaluation of foreign debt assets held by developing countries due to currency overissuance in developed countries may increase the allocation of stable assets such as gold.

From a multi-point of view, "de-dollarization" may not be the core driver of central bank gold purchases in recent years. 1) according to a survey conducted by the World Gold Council, among the influencing factors of gold purchase decisions made by central banks and other institutions, most of them are based on the historical status of gold, risk aversion and no risk of default. The proportion that "de-dollarization" is highly related to gold purchase is only 4%, and the proportion is obviously lower. 2) countries with a strong demand for "de-dollarization", such as Russia, have not increased the net purchase of gold (only 28 tons of gold reserves have been increased so far in 2022). It is significantly lower than in 2014-2019); 3) the share of the US dollar in global foreign exchange reserves has not declined significantly and has remained at around 58.5 per cent since 2022, and the proportion of foreign holders in the holder structure of US Treasuries has always remained around 30 per cent.

4. At present, although the scale of gold purchases by central banks is high and the structural characteristics are obvious, there has been no significant increase since March. In other words, central banks may not be the core factor driving the sustained rise in gold prices this round.

Since 2022, the scale of gold purchases by central banks is relatively high, but the growth of actual gold reserves is not fast, and the structural characteristics are obvious. The increment of gold reserves by the central bank of China accounts for nearly 60%. As mentioned earlier, global central bank gold purchases increased significantly from 2022 to 2023, accounting for a significant increase compared with previous years. However, in terms of net purchases, global central bank gold reserves did not increase significantly from 2022 to 2023, with 35483 tons at the end of 2022, down 29.3 tons from the previous year. Structurally, China's central bank is the main net buying force of gold. Since November 2022, the central bank's gold foreign exchange reserves have increased by 309.2 tons, accounting for 59.3% of the overall central bank's gold reserve increment.

In terms of the impact on gold prices, the relationship between gold purchases by central banks and gold prices is unstable and has not increased significantly since March, which may not be the core factor driving up gold prices this round. Looking back at the historical data, the relationship between gold purchases by central banks and gold prices is unstable, and short-term central bank purchases of gold do not necessarily lead to a rise in gold prices. Recently, a more typical example is Q3 in 2023. Central bank gold purchases reached 353.2 tons in a single quarter, the second highest since 2010, but gold prices still fell 2.5 per cent in the same period. Judging from the changes in global gold reserves in March, there was no significant increase, with an increase of only 11.2 tons over the previous month. China, as a major net buyer of gold in recent years, had gold reserves of 72.74 million ounces in March, an increase of 160000 ounces over the previous month, the smallest increase since the end of 2021. Accordingly, it is inclined to think that central bank gold purchases may not be the core factor driving the sharp rise in gold this round.

5. Looking back, given the background of increased geopolitical uncertainties and superimposed currency overissuance, the central bank's purchase of gold may still be a major trend. Continue to hint: under the disturbance of trading factors, short-term gold price fluctuations may be amplified, and there may be a correction risk, but the year as a whole is still on the high side.

The survey shows that the central bank is still willing to buy gold, and the central bank's gold reserves may continue to grow. As mentioned earlier, with the flood of liquidity in recent years and increased geopolitical uncertainty, the demand for gold allocation is likely to continue to grow. According to a survey conducted by the World Gold Council in mid-2023, the central bank will increase its gold reserves by 71% in the next 12 months, the highest in the past five years and only lower than in 2020.

Continue to suggest that short-term gold price fluctuations may be magnified and pay attention to the risk of correction, which is still too high during the year as a whole. Maintain the point of view of our previous report "Review and Prospect of the current Round of Gold rally": through a detailed review, taking history as a mirror, and multi-dimensional comparison: this round of gold rise is supported by fundamentals at first, and then gradually deviates from fundamentals. It is most likely to be dominated by trading factors, that is, the momentum effect and "forced air" effect after breaking new highs. Looking back, short-term gold should have a pullback risk, but the year as a whole is still on the high side, can wait for the callback to choose the opportunity to configure.

The author: Xiong Yuan, Mu Renwen, source: Guosheng Securities Research Institute, this article is excerpted from the report of Guosheng Securities Research Institute released on April 15, 2024, "is this round of gold new highs bought by global central banks?" "