Gold price growth under scrutiny: This is why gold is increasingly popular with Asian central banks

Gold prices had a strong year. In addition to the prospect of interest rates falling again, massive gold purchases by many Asian central banks may have been a decisive factor in price gains. Why is gold so attractive to the central banks of China, India et al.

• Asian central banks significantly increased their gold reserves in 2023
• US sanctions against Russia increase desire for diversification
• Expert: Despite “de-dollarization” tendencies, the US dollar remains the benchmark for now

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In fact, they are suffering The price of gold under high interest rate level. High interest rates make fixed interest investments like bonds difficult gold, which does not arouse interest, is more attractive. Still, the price of gold has risen significantly in recent months – despite the high interest rate environment.

Since the beginning of January, the yellow precious metal has appreciated by 13.48 percent at the current price of $2,076.70 (as of December 28, 2023). In the last three months alone, gold investors could enjoy a profit of 10.37 percent. In addition to its attractiveness as Protection against inflation and the prospect of a first interest rate cut in 2024, were likely primarily responsible for the Asian central bank’s price hike.

Asian central banks increase their gold holdings

Many Asian central banks were among the biggest buyers of gold in 2023. According to the World Gold Council, central banks made the third largest purchases of gold ever between July and September. By the end of October, purchases had increased by 14 percent compared to the previous year. The The main buyer in the third quarter was the People’s Bank of China between central banks. China’s central bank’s gold reserves have increased by around 200 tonnes of gold over the past twelve months. According to Bloomberg, China bought 23 tons of gold in October alone. The total gold reserve is now 2,215 tons, which is more than the countries of Africa and Latin America, as well as India combined.

However, the People’s Bank of China was far from the only buyer of gold in Asia in 2023: the central banks of Singapore, India and the Philippines also massively increased their gold reserves. The group of buyers also included banks from Russia, Qatar and Kyrgyzstan. Since the outbreak of the Ukraine war in February 2022, central banks have bought more than two and a half times the average amount of gold per quarter over the past decade, according to a World Gold Council report.

US sanctions against Russia have exposed geopolitical risks to US dollar reserves

According to a report by Sprott Asset Management, the US decision was made by a Russian American dollar-Seize $650 billion in reserves by 2022 to make it clear to Asian central banks that their US dollar reserves are not sacrosanct. That’s why more and more central banks — especially the People’s Bank of China — are relying on gold to reduce their exposure to US dollars. According to Sprott’s report, cited by the South China Morning Post, this signals “a strong desire to diversify away from the US dollar and US dollar assets”.

The head of the central banking department at the World Gold Council, Shaokai Fan, sees similar reasons. “Rising geopolitical uncertainty coupled with concerns about sanctions on foreign reserves are undoubtedly important factors,” he said. Banks either have low gold reserves or “have large reserves of US dollars, which could lead to a greater desire to diversify,” Fan added to the South China Morning Post.

The “de-dollarization” debate

The discussion of “de-dollarization”, i.e. reducing the dominance of the US dollar, has gained importance since the introduction of US sanctions against Russia in 2022. Alternative currency models have been proposed. In April this year, for example, Malaysian Prime Minister Anwar Ibrahim spoke out in favor of a new currency that the BRICS countries – Brazil, Russia, India, China and South Africa – could use to conduct global trade.

“The US government’s sanctions against several countries – which some have described as weaponizing the US dollar – have led vulnerable governments to seek reserve assets that are not in immediate danger of exclusion,” said Ross Norman, London-based managing director of US government securities. metals website Metals Daily, readers of the “South China Morning Post” the situation in the international foreign exchange market.

However, there is no real alternative to the US dollar when it comes to foreign exchange reserves – although they do exist Euro, Japanese yen, British pound or Chinese yuan Key currencies and part of the International Monetary Fund (IMF) currency basket. However, these currencies are regional rather than global in importance and do not approach the importance of the US dollar. Therefore, central banks see gold as the best alternative to the US dollar in terms of their reserve assets, especially since it is considered particularly stable in value and independent of geopolitical upheavals. Moreover, it can be purchased worldwide.

What could happen in 2024

The question arises as to how gold purchases by Asian central banks will develop in 2024. Fan expects a slower continuation of de-dollarization in terms of central bank reserve assets. “Broadly speaking, we expect central banks to continue to do so in 2024 Buy gold “However, purchases will not be as high as in recent years,” Fan said. The already significant increase in gold prices could be a slowing factor.

On the other hand, a further falling US dollar could boost the price of gold, as the precious metal quoted in US dollars will then become cheaper for buyers from non-US currency areas – such as Asian central banks. In the past, central bank buying programs were “quite independent” of price, but “today they are more differentiated and tend to accelerate purchases when prices are perceived to be cheap,” Norman said.

However, diversification into gold should not be overstated, says Gnanasekhar Thiagarajan, head of Indian financial analyst firm Commtrendz Risk Management. Although central banks’ intention to diversify their asset reserves by buying gold could continue into the new year, it is absurd to sing a swan song for the US dollar. “The US dollar can be parked in interest-bearing assets, while gold cannot Return until it is sold,” emphasizes Thiagarajan. “Therefore, gold will only account for a smaller share. Most of the foreign exchange reserves will remain in the US dollar,” Thiagarajan concludes.

However, with the current weighting of gold at many central banks below the usually intended 10 and 20 percent, further increases in central bank gold reserves – and the associated pressure on gold demand – could also be within the realm of possibility. in 2024. editorial team

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