Commodities
This central bank is likely to remain a major buyer in the gold market
Investing.com — ’s rise this year has surpassed other commodities such as and , distinguishing it in global markets.
The rise in gold prices has been driven in part by central bank purchases, which have become a significant factor in recent years.
As per analysts at BCA Research in a note dated Friday, central banks, especially those in emerging markets, have expanded their gold reserves, and this trend is expected to continue.
These purchases have contributed to sustained demand for gold, supporting the potential for further price increases in the near future.
In recent years, central banks have become one of the most important drivers of gold demand. “Central bank purchases in the first half of this year reached the highest first half year on records dating back to 2000,” the analysts said.
Over the past two years, central banks have accounted for around a quarter of global gold demand—more than double the 11% average of the previous five years. Emerging market central banks have led this charge, increasing their reserves of the precious metal for a variety of strategic reasons.
The reasons behind central bank gold purchases are linked to several key factors. Gold’s value is supported by its limited supply, which differs from fiat currencies that can be subject to inflation or devaluation due to increases in money supply.
As a result, gold serves as a hedge against inflation and currency devaluation, which are important considerations for central banks.
Additionally, gold does not carry credit or counterparty risk, providing central banks with a safeguard against economic instability or financial disruptions.
Furthermore, gold’s tendency to move inversely to the U.S. dollar offers a means of diversifying reserve portfolios, helping to protect reserves during periods of dollar weakness.
Geopolitical considerations have further fueled the push toward gold.
“The West’s response to Russia’s invasion of Ukraine ultimately underscores the vulnerability of holding reserves in traditional currencies,” the analysts said.
Sanctions against Russia resulted in the freezing of its foreign reserves, prompting other countries to consider the security of their own reserves.
Gold, being a tangible asset that central banks can fully control, provides protection from such risks.
According to the World Gold Council’s latest Central Bank Gold Reserves Survey, the outlook for continued central bank demand is robust.
The survey found that 81% of central banks expect global gold reserves to increase over the coming year, the highest percentage in the survey’s six-year history.
This sentiment is not just global; 29% of central banks specifically expect their own gold reserves to rise, signaling a strong commitment to further accumulation.
One of the central players in this wave of gold purchases is the People’s Bank of China (PBoC). Since 2022, the PBoC has increased its gold reserves by an impressive 316 metric tons, an average of 11 tons per month.
However, in recent months (May to July 2023), the PBoC has reported no new purchases, raising questions about whether rising gold prices have caused a temporary pause in their buying.
BCA Research analysts believe that while the PBoC may be sensitive to short-term price fluctuations, its long-term strategy to diversify away from U.S. dollar-denominated assets will remain the dominant factor.
Gold plays a crucial role in China’s effort to reduce its reliance on the dollar, and this strategic imperative is likely to sustain future purchases, regardless of near-term price trends.
Historically, the PBoC has been known for its opacity regarding gold purchases, often disclosing large increases only after years of accumulation. For instance, in 2015, China revealed that it had increased its gold reserves by 60% over the previous six years, during which no purchases had been reported.
Despite its recent gold-buying spree, gold still makes up only 4.9% of China’s total reserves, compared to an average of 15% for other upper-middle-income economies. This leaves substantial room for further accumulation.
If the PBoC were to increase the share of gold in its reserves to 15% over the next decade, it would need to purchase roughly 120 tons of gold per quarter, which would account for 11% of global annual gold demand at current levels. Such an increase would have an impact on the gold market, boosting prices further.
China is not alone in its enthusiasm for gold. Other emerging market central banks have also significantly boosted their gold holdings in recent years. Poland, for instance, has explicitly set a goal to increase gold’s share of its reserves from 13.5% to 20% in the coming years.
The Polish central bank has already bought 149 metric tons of gold since the second quarter of 2023, and further purchases are expected. This aligns with a broader trend among EM central banks to diversify their reserves and reduce their exposure to the U.S. dollar.
Similarly, the Reserve Bank of India has been steadily increasing its gold reserves as part of a strategy to diversify its assets. The RBI has also repatriated a significant portion of its gold reserves from foreign vaults, transferring 100 tons from the UK to India earlier this year.
Nigeria has taken similar steps, repatriating its gold from the U.S. to domestic storage. These moves reflect a growing desire among EM central banks to safeguard their gold reserves and shield them from potential geopolitical risks.
The broader strategic trend of EM central banks increasing their gold holdings is clear. Gold provides these countries with a secure store of value, free from the potential risks associated with holding reserves in foreign currencies, particularly the U.S. dollar.
The geopolitical climate and recent global events have reinforced the importance of this diversification strategy.
In addition to this the current economic outlook is also supportive of gold. As per BCA Research, a global economic downturn is projected by late 2024 or early 2025, a period during which gold has typically performed well.
During times of below-trend economic activity, central banks often increase their gold purchases as a precautionary measure. As a result, the potential for an economic slowdown in the coming year is likely to sustain strong demand from central banks.
In addition to central bank demand, real interest rates are a key factor influencing gold prices. As U.S. real interest rates decline, the opportunity cost of holding gold decreases, making it a more attractive investment.
“Real interest rates will likely downshift as the Fed will probably start the easing cycle at the September 17-18 FOMC meeting,” the analysts said, which would further incentivize both institutional and central bank gold purchases.
Indeed, global gold ETFs have already seen four consecutive months of inflows, reversing nearly a year of outflows and signaling renewed interest from investors.
By Paul Carsten
(Reuters) – Oil prices rose on Thursday after a large interest rate cut from the U.S. Federal Reserve, but Brent was still hovering around its lowest levels of the year, below $75, on expectations of weaker global demand.
futures for November were up 66 cents, or 0.9%, to $74.31 a barrel at 1156 GMT, while WTI crude futures for October were up 58 cents, or 0.8%, to $71.49 a barrel. The benchmarks had earlier risen more than $1 each.
The U.S. central bank cut interest rates by half a percentage point on Wednesday. Interest rate cuts typically boost economic activity and energy demand, but the market also saw it as a sign of a weaker U.S. labor market that could slow the economy.
“While the 50 basis point cut hints at harsh economic headwinds ahead, bearish investors were left unsatisfied after the Fed raised the medium-term outlook for rates,” ANZ analysts said in a note.
The Bank of England on Thursday held interest rates at 5.0%.
Weak demand from China’s slowing economy continued to weigh on oil prices.
Refinery output in China slowed for a fifth month in August, statistics bureau data showed over the weekend. China’s industrial output growth also slowed to a five-month low last month, and retail sales and new home prices weakened further.
Markets were also keeping an eye on events in the Middle East after walkie-talkies used by Lebanese armed group Hezbollah exploded on Wednesday following similar explosions of pagers the previous day.
Security sources said Israeli spy agency Mossad was responsible, but Israeli officials did not comment on the attacks.
Citi analysts say they expect a counter-seasonal oil market deficit of around 0.4 million barrels per day (bpd) to support Brent crude prices in the $70 to $75 a barrel range during the next quarter, but that would be temporary.
“As 2025 global oil balances deteriorate in most scenarios, we still anticipate renewed price weakness in 2025 with Brent on a path to $60/barrel,” Citi said in a note on Thursday.
Investing.com — Brent crude oil prices could be bolstered in the near-term by demand possibly outstripping supply in the fourth quarter, according to analysts at Citi.
A reported decision by the Organization of the Petroleum Exporting Countries and its allies to delay the beginning of a tapering in voluntary output cuts, along with ongoing supply losses in Libya, is predicted to contribute to a oil market deficit of around 0.4 million barrels per day in the final three months of 2024, the Citi analysts said.
They added that such a trend could offer some temporary support to “in the $70 to $75 per barrel range.”
Meanwhile, the benchmark could be further boosted by a potential rebound in recently tepid demand from top oil importer China, the analysts said.
But they flagged that they still anticipate “renewed price weakness” in 2025, with Brent on a path to $60 per barrel due to an impending surplus of one million barrels per day.
On Thursday, crude prices were higher after a super-sized interest rate cut from the US Federal Reserve elicited a mixed reaction from traders, while worries over global demand also lingered.
By 03:30 ET, the Brent contract gained 0.9% to $74.34 per barrel, while futures (WTI) traded 1.0% higher at $70.58 per barrel. The benchmarks had recovered after slipping in Asian trading, with Brent in particular hovering near its lowest mark of the year.
The Fed slashed interest rates by 50 basis points on Wednesday and indicated that it would announce further cuts this year, as the central bank kicks off an easing cycle to shore up the economy following a prolonged battle against surging inflation.
Lower rates usually bode well for economic activity, but the Fed’s aggressive cut also sparked some concerns over a potential slowdown in broader growth.
While Fed Chair Jerome Powell moved to soothe some of these fears, he also said that the Fed had no intention of returning to an era of ultra-low interest rates, and that the central bank’s neutral rate was likely to be much higher than seen in the past.
His comments indicated that while interest rates will fall in the near-term, the Fed was likely to keep rates higher in the medium-to-long term.
Meanwhile, US government data released on Wednesday showed a bigger-than-expected, 1.63 million barrel draw in inventories, which analysts at Citi said was due to lower net imports and domestic production “outpacing” a drop of crude oil consumed by refineries.
“US crude output was hit by Hurricane Francine, with a peak of 732,000 [barrels per day] of offshore Gulf of Mexico oil output shut-in […], with the tail end of the impact reaching until Tues[day] Sept. 17, which should still show up in next week’s data,” the Citi analysts said in a note to clients.
While the fall was much bigger than expectations for a decrease of 0.2 mb, it was also accompanied by builds in distillates and gasoline inventories. The increses in product inventories added to worries that U.S. fuel demand was cooling as the travel-heavy summer season wound to a close.
Investing.com– Gold prices moved in a flat-to-low range in Asian trade on Thursday, and were nursing overnight losses after less dovish signals from the Federal Reserve offset some optimism over a bumper rate cut.
Strength in the pressured bullion prices, as the greenback rose sharply on bets that U.S. interest rates may not fall as much as expected in the medium to long term.
The yellow metal also saw some profit-taking after hitting record highs in the run-up to Wednesday’s Fed decision.
rose 0.1% to $2,561.30 an ounce, while expiring in December fell 0.5% to $2,585.65 an ounce by 00:24 ET (04:24 GMT). Spot prices were nursing some overnight losses, and pulled back further from recent record highs.
Fed cuts rates by 50 bps, but offers less dovish outlook
The Fed by 50 basis points- the upper end of market expectations- in its first rate cut since the COVID-19 pandemic in 2020. The central bank also announced the beginning of an easing cycle.
Fed Chair Jerome Powell quelled some concerns over a slowing economy after the outsized rate cut, stating that risks between rising inflation and a softer labor market were evenly balanced. Powell flagged the prospect of more rate cuts, with markets pricing in a total of 125 bps worth of rate cuts by the year-end.
But Powell also said the Fed had no intention of returning to an ultra-low rate environment as seen during COVID-19, and said the Fed’s neutral rate will be much higher than seen previously.
His comments presented a higher outlook for rates in the medium-to-long term, and somewhat diminished optimism over Wednesday’s cut.
Still, the prospect of lower rates bodes well for non-yielding assets such as gold, given that it decreases the opportunity cost of investing in bullion.
Other precious metals rose on Thursday, but were also nursing overnight losses. rose 0.5% to $978.15 an ounce, while rose 0.2% to $30.755 an ounce.
Copper prices rise, China rate decision awaited
Among industrial metals, copper prices advanced on Thursday amid expectations of more stimulus measures from top importer China, with an interest rate decision from the country due on Friday.
Benchmark on the London Metal Exchange rose 0.4% to $9,425.50 a ton, while one-month rose 0.6% to $4.2970 a pound.
The People’s Bank of China is widely expected to keep its benchmark unchanged on Friday. But persistent signs of economic weakness in the country are expected to eventually spur further cuts in the LPR.
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