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.
Investing.com– Gold prices rose slightly in Asian trade on Wednesday, keeping recent record highs in sight as traders waited to see just by how much the Federal Reserve will cut interest rates.
Bullion prices briefly hit record highs this week amid growing expectations for a 50 basis point cut, which dented the dollar and Treasury yields. But some stronger-than-expected U.S. data complicated expectations of a large rate cut.
rose 0.2% to $2,574.15 an ounce, while rose 0.3% to $2,600.40 an ounce by 00:16 ET (04:16 GMT).
Gold just below record highs with rate cuts in focus
Spot prices were just below a record high of $2,589.78 an ounce hit earlier this week.
Gold’s biggest point of support was growing conviction that the Fed will at the conclusion of a meeting later on Wednesday.
While markets were initially split over a 25 or 50 basis point cut, showed expectations shifting towards a 50 bps reduction in recent sessions.
Bets on a 50 bps cut persisted even as recent and inflation data read stronger than expected, reflecting some resilience in the U.S. economy.
But concerns over a weakening labor market are expected to see the Fed kick off an easing cycle that could bring interest rates lower by at least 100 bps by the end of 2024.
Lower rates bode well for gold and other precious metals, given that they herald a lower opportunity cost to invest in non-yielding assets.
But other precious metals lagged gold, with down 0.5% to $983.90 an ounce, while fell 0.5% to $30.837 an ounce.
Copper slides as China markets reopen
Among industrial metals, copper prices fell on Wednesday as markets in top importer China reopened after a long weekend, with local traders reacting to more weak economic data from the country.
Benchmark on the London Metal Exchange fell 0.6% to $9,326.50 a ton, while one-month fell 0.9% to $4.2475 a pound.
Weak industrial production and retail sales data from China, released over the weekend, pointed to sustained weakness in the country’s biggest economic engines, which traders feared could further dent its appetite for copper.
But the weak readings also spurred some bets that Beijing will be forced into rolling out more stimulus measures, which could boost near-term growth and help buoy copper demand.
This notion helped limit overall losses in copper.
Investing.com– Oil prices fell in Asian trade on Wednesday, cutting short a recent rebound as industry data showed an unexpected increase in U.S. inventories.
But prices were sitting on strong gains over the past week as persistent supply disruptions from Hurricane Francine and the prospect of lower rates saw traders pile into crude at heavily discounted levels.
An escalation in Middle East tensions also helped spur some demand for crude, as Hezbollah vowed retaliation against Israel after accusing it of detonating pagers across Lebanon this week.
fell 0.4% to $73.41 a barrel, while fell 0.4% to $69.69 a barrel by 21:17 ET (01:17 GMT). Both contracts rose sharply from near three-year lows over the past week.
US inventories unexpectedly increase- API
Data from the showed U.S. oil inventories saw an unexpected build in the week to September 13.
Inventories grew by 1.96 million barrels, compared to expectations for a draw of 0.1 mb and a 2.79 mb draw from the prior week.
The reading comes after official data last week showed a build in U.S. inventories, indicating that demand in the world’s biggest fuel consumer was cooling with the end of the travel-heavy summer season.
The API data usually heralds a similar reading from , which is due later on Wednesday. The unexpected build also indicates limited, actual disruptions to production from Hurricane Francine, which barreled through the Gulf of Mexico last week.
Demand concerns, rate cuts in focus
Chinese markets reopened on Wednesday after an extended holiday, with local traders reacting to a barrage of weak economic readings from the country.
The readings had ramped up concerns over slowing growth in the world’s biggest oil importer, which could potentially dent its appetite for crude.
Markets were also on edge before the conclusion of a two-day later in the day, where the central bank is widely expected to cut interest rates for the first time in over four years.
Markets are split between expectations for a 25 or 50 basis point reduction.
Anticipation of Wednesday’s decision pulled down the dollar, which helped spur some gains in crude.
By Sabrina Valle
HOUSTON (Reuters) -Chevron CEO Michael Wirth on Tuesday criticized U.S. President Joe Biden’s administration for what he described as “attacks on the natural gas” industry and emphasized the crucial role of Permian in powering the rapid growth of artificial intelligence (AI).
The CEO’s remarks followed new government plans over policies to prevent power-hungry AI data centers from undercutting U.S. climate goals. Last week, the White House launched a task force on AI Datacenter Infrastructure to coordinate policies in line with the government’s economic and environmental goals.
Wirth defended leveraging low-carbon gas over coal to meet the increasing energy demands of the AI sector.
“AI’s advance will depend not only on the design labs of Silicon Valley, but also on the gas fields of the Permian basin,” Wirth said at Gastech conference in Houston.
Chevron (NYSE:), the No.2 U.S. oil producer, is one of the top players in the Permian basin that straddles Texas and New Mexico. The Permian is the biggest U.S. oilfield and accounts for 15% of the nation’s gas output.
Wirth said the Biden administration’s approach to pause liquefied natural gas (LNG) exports “elevates politics over progress.”
In January, Biden announced the pause on approvals for pending and future applications to export LNG from new projects, a move cheered by climate activists, that could delay decisions on new plants until after the Nov. 5 election.
He argued that a moratorium on LNG exports would increase energy costs, threaten reliable supplies, and slow the switch from coal to natural gas, leading to more emissions rather than less.
“Instead of imposing a moratorium on LNG exports, the administration should stop the attacks on natural gas,” he added.
Wirth underscored the role of gas in reducing global carbon emissions, citing data from the International Energy Agency (IEA) that attributed over a third of total global greenhouse gas emissions in 2022 to coal combustion.
Switching from coal to gas, he suggested, could be “the single greatest carbon reduction initiative in history.”
“The case for natural gas is so strong that only politics can get in the way,” he said.
In the midst of the global desire to decarbonize, Wirth stressed the need for a stable and predictable policy environment to ensure gas remains a reliable energy source.
He outlined three pillars for a balanced energy future: political support for gas as a key to a lower carbon future; recognition of the progress made in deploying new technologies and gas solutions; and understanding that the energy transition requires unprecedented innovation and collaboration.
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