In a time of extraordinary political volatility, something big is happening in the gold market and nowhere is that more apparent than in central banks. In 2018, central banks added 651.5 tonnes to their holdings, a 74% increase from the previous year, according to the World Gold Council (WGC).
Not only is this a remarkable change from 2017, but it’s also the most on record going back to 1971, when the U.S. ended the gold standard. The WGC has estimated that central banks now hold nearly 34,000 tons of gold. Among the biggest purchasers were Russia, Turkey and Kazakhstan. Other central banks, such as Poland’s, Hungary's and India's have returned to gold after long periods of absence, for diversification purposes, fuelled by worries over slowing global growth and heightened geopolitical tensions.
Supply and demand figures
WGC said total gold demand in 2018 reached a total of 4,345.1 tonnes, up 4% on 2017 and in line with five-year average demand of 4,347.5 tonnes. The biggest demand came from jewelry which, while flat on the 2017 figure, accounted for just over half of the total. Gains in China (3%), the US (4%) and Russia (9%) broadly offset sharp losses in the Middle East, where demand dropped 15% on 2017. Indian demand was stable at 598 tonnes, a drop of only 4 tonnes from the previous year.
Bars and coins contributed 1,090 tons in 2018, marking a 4 percent rise from the previous year.Coin demand surged to reach a five-year high of 236.4 tnnes, the second-highest on record. Demand for gold bars held steady at 781.6 tonnes, the fifth year in succession of holding in a firm 780-800 tonnes range.
Gold used in technology climbed marginally to 334.6 tonnes. After healthy gains during the first three quarters of 2018, a combination of slowing smartphone sales, the US-China trade war and mounting uncertainty over global economic growth contributed to a 5% decline in Q4, to 84.1tonnes, the report said.
Gold-backed exchange traded fund (ETF) inflows fell 67%. However, Europe was the only region to see net growth over the year as a whole.
The total supply of gold grew marginally by 1% in 2018, up from 4,447.2t to 4,490.2t. This growth was supported by similar y-o-y increases in mine production – to a new record high – and recycled gold.
(Graph Source: World Gold Council)
“Gold demand rose in 2018 and, although the US dollar gold price was down 1% over the year, it outperformed many other financial assets. Worries about a slowdown in global growth, heightened geopolitical tensions, and financial market volatility saw central bank demand hit its highest level since Nixon closed the gold window in 1971, the volume of gold in European-listed ETFs reach a record high, and annual coin demand leap 26%. But some of these factors may prove to be headwinds for some parts of the market. Jewellery and technology demand slowed in Q4 as consumer confidence waned in many markets. I don’t see any of the risks that investors and central banks are worried about fading anytime soon and I expect gold to remain an attractive hedge in 2019 ”Alistair Hewitt, Head of Market Intelligence at the World Gold Council, said in a statement.
Safety in diversity
The gold boom could be far from over yet with central banks expected to acquire an additional 600 tonnes of the precious metal this year, according to the consulting firm Metals Focus.
In January, mainland China, Turkey and Argentina saw the highest increases to their central bank gold holdings, adding 11.8t, 7.6t and 7.0t respectively while in February Russia, China, Qatar and Kazakhstan added 31.2t, 10.0t, 3.1t and 3.0t respectively,
the WGC said.
In September 2018, Professor of Business Economics at Brunel University London Francesco Moscone told Express.co.uk that countries are purchasing gold as they seek to protect themselves from the US dollar hegemony and its fluctuations.
“Most of the emerging economies have dollar-denominated debt, making them quite vulnerable to further Washington increase in the interest rates” Moscone explained.
But central bankers are not only stocking up on gold. They are also looking at repatriating their gold home. Back in 2013, Germany asked the US for some of their gold back. Similar moves by Venezuela, Austria, Netherland and Turkey followed.
Are central banks stocking up on gold only to diversify, or possibly to prepare for the next downturn?