Biggest Catalyst for $3,000/Ounce Gold Price: Central Banks’ Hunger for Gold
You were warned here many times, and you might still have some time to act if you haven’t already. If you want to know where gold prices are headed, you can’t ignore central banks. They’ve been a huge buying force in the gold market lately.
In 2022, central banks did something extraordinary that made the case for higher gold prices much stronger. Last year, central banks broke some records by a very large margin. However, since gold wasn’t a “hot” thing to talk about, this story went largely underreported.
You have to ask: “Do central banks know something we don’t?”
Here’s some perspective.
Central banks have been net buyers of gold since right after the financial crisis of 2008–2009. The price of the yellow precious metal doesn’t matter to them whatsoever; those banks just want to own more of it.
Why do they want gold? The precious metal is an asset that offers safety like no other. It’s a great hedge against inflation, economic uncertainty, and currency devaluation. So, central banks keep it in their foreign reserves to reduce volatility.
Each year since the 2008/2009 financial crisis, central banks have bought gold like clockwork. In 2018 and 2019, central banks bought record amounts of the precious metal. They were eyebrow-raising amounts—the highest since the 1960s. In 2020 and 2021, their gold purchases remained resilient despite the economy being fragile.
Then, in 2022, central banks did something we haven’t seen them do in recent history. They purchased 1,136 tonnes of gold for their reserves. This was the highest amount of gold central banks have ever purchased on record, going back to 1950! (Source: “Gold Demand Trends Full Year 2022,” Goldhub, January 31, 2023.)
On average, gold mines globally produce 3,300 tonnes of gold a year. That means central banks bought 34% of the global gold mine production in 2022. Since their gold purchases amounted to 450.1 tonnes in 2021, this represents a year-over-year increase of more than 152%.
Which Central Banks Have Been Buying Gold?
You won’t find banks like the U.S. Federal Reserve or the European Central Bank (ECB) active in the gold market these days. It’s mainly the smaller central banks that never had gold, and got a rude awakening over the past decade or so. They realized that currencies can be volatile, so they need something to keep their reserves anchored.
The list of central banks buying gold has been getting bigger.
In 2022, the People’s Bank of China (PBOC) reported its first gold purchases since 2019. It now has more than 2,000 tonnes of the yellow precious metal in its reserves. Between 2002 and 2019, the Chinese central bank purchased 1,448 tonnes of gold. Mind you, the PBOC is usually known as a quiet purchaser; it buys for extended periods then reports later.
Turkey’s central bank has built a huge appetite for gold as well. In 2022, the Central Bank of Turkey bought 148 tonnes of gold. Its gold reserve now stands at 542 tonnes.
Central banks in the Middle East have also been buying gold. In 2022, Iraq, Oman, Qatar, and United Arab Emirates were active buyers of the metal. Egypt bought 47 tonnes of gold in 2022. Just so you know, Egypt has been witnessing a currency crisis; the country’s currency has declined significantly.
The Reserve Bank of India bought 33 tonnes of gold in 2022. Its gold reserves now stand at 787 tonnes.
How High Could Gold Prices Go?
Dear reader, looking at what central banks have been doing, it’s hard not to be bullish on gold prices. I’m confident that central banks aren’t done buying gold yet. Their actions have been speaking louder than their words. If we assume they’ll be racking up their reserves to 10% gold, they’ll need to buy more of the precious metal. Mark my words: you won’t hear central banks announce that they’re buying gold. They’ll buy first and report later. This way, they’ll prevent speculators from front-running them.
I’ve been watching central banks’ buying trends for years now and have written lots about it. As I said earlier, they’re currently making a strong case for higher gold prices. If central banks remain in the gold market, they could be one of the biggest catalysts to take gold prices to $3,000 per ounce in no time.
Right now, central banks buying gold is probably one of the most underreported stories out there. As soon as the topic hits the mainstream media and average investors start to jump in, you could bet gold prices will soar very quickly.
Also worth watching are the gold miners. Throughout 2022, gold mining companies were punished by investors as gold prices remained relatively flat. There’s a significant amount of value in gold miner stocks if the price of gold jumps to $3,000 per ounce. Miners could provide leveraged returns, and some even offer dividends. So, generating income is possible, too.