Bars of 99.99% pure gold are placed in a work room at the Krastsvetmet precious metals factory in the Siberian city of Krasnoyarsk, Russia, January 31, 2023.
Alexander Manzyuk | Reuters
Gold demand hit an 11-year high in 2022 thanks to “colossal central bank buying, aided by vigorous buying by retail investors,” according to the World Gold Council.
Annual gold demand jumped 18% to 4,741 tonnes (excluding over-the-counter or over-the-counter trading) throughout the year, the highest annual figure since 2011, fueled by demand record 1,337 tons in the fourth quarter.
Key to the surge was a 55-year high of 1,136 tonnes purchased by central banks during the year, the industry-backed group revealed, noting the majority of those purchases were ‘undeclared’ .
That marked a 152% increase from 2021, when central banks bought just 450 tonnes of gold, and the World Gold Council attributed the spike to geopolitical uncertainty and high inflation.
“Net purchases by the central bank in the fourth quarter totaled 417t, bringing the total purchases for the second half to 862t. Echoing the third quarter, the data for the last quarter of the year was again a combination of ‘reported purchases and a substantial estimate of unreported purchases,’ the WGC said.
“If more information about this unreported activity becomes available, these estimates may be revised.”
Investment demand for gold rose 10% to 1,107 tonnes, while holdings of gold ETFs (exchange-traded funds) saw smaller outflows in 2022 than the year before.
Jewelry consumption fell 3% in 2022 to 2,086 tonnes, with much of the weakness concentrated in the fourth quarter as gold prices recovered.
Total annual gold supply increased by 2% in 2022 to 4,755 tonnes, with mine production reaching a four-year high of 3,612 tonnes.
Pooled central bank purchases
“This marked a record year for central bank purchases: 2022 was not only the thirteenth consecutive year of net purchases, but also the second-highest level of annual demand on record since 1950, spurred by a demand of +400t in Q3 and Q4,” the WGC said.
The group’s annual survey of policymakers found the main drivers of gold holdings to be its “performance in times of crisis” and its “role as a source of long-term value”.
“It is therefore not surprising that in a year marked by geopolitical uncertainty and runaway inflation, central banks have chosen to continue adding gold to their coffers and at an accelerating pace. ”
The majority of central bank purchases in 2022 came from emerging markets, with the Central Bank of Turkey being the biggest buyer with a record 542 tonnes. China, India, Egypt, Qatar, Iraq, United Arab Emirates and Oman all significantly increased their gold reserves during the year.
“It may be different this time”
Despite a difficult environment of rapid interest rate increases and a strong American dollars for much of the year, the resurgence in the fourth quarter was enough for gold prices to post a slight gain for 2022, with a quarterly gain of 3% taking the precious metal to an annual increase of 0, 4%.
Gold generally weakens in times of rising interest rates and a strong dollar, in part because it is priced in US dollars despite most of the demand coming from outside the United States, Wells Fargo pointed out in a note last week. This means that the purchasing power of non-US buyers is reduced and hurts global demand for gold.
John LaForge, head of real assets strategy at Wells Fargo, also noted that because gold is a non-interest-bearing asset, it becomes less attractive to institutional investors who can buy treasury bills and other interest-bearing assets. interest when rates rise.
Gold started 2022 well, up 12% through March, but fell once the US Federal Reserve began aggressively raising interest rates to contain inflation, leading to a stronger dollar and creating significant headwinds for the precious metal.
The spot gold price has also risen more than 5% so far in 2023, trading at around $1,926 per troy ounce on Wednesday morning. LaForge said that although Wells Fargo currently has a neutral view on precious metals relative to other commodities, the US banking giant does not necessarily expect poor performance.
Wells Fargo’s year-end target range remains $1,900-$2,000, but LaForge said “it could be different this time.”
“We may even need to increase our 2023 year-end target range if the US dollar stays within the range and if we become confident that rate hikes are nearing their end,” he added.
Gold becomes “very expensive” for consumers
James Steel, Chief Precious Metals Analyst at HSBCsaid rising prices could eventually start to compress demand in 2023 as gold becomes “very expensive for consumers”, especially as around 70% of purchases are concentrated in emerging markets.
“On the ground buying – coins, bars, jewelry – is going to get more and more expensive and that could very well at least dampen the rally, so I would certainly be cautious, and the HSBC camp is that the Fed will hold rates and not cut them in the second half of the year,” he said.
“If this comes to pass as 2023 unfolds, it could also take some of the oxygen out of the gold market.”