Precious metal: Central banks buy crisis currency gold – and stabilize the price

Central banks around the world are continuing their purchases of gold. Purchases of ETFs are also increasing. In the short term, however, things could become uncomfortable again on the precious metals market, experts warn.

Dusseldorf. The strong dollar and rising interest rates are affecting gold. The price for a troy ounce of the precious metal has fallen by seven percent to around $4,100 since the beginning of September, data from the financial service LSEG show. The price could be even lower if central banks around the world did not increase their gold reserves.

In August, central banks bought a total of 39 tons of gold net, said the World Gold Council, an industry association. Since the beginning of the year, reported net purchases now total 170 tons.

China was again the largest buyer in August with 20 tonnes, followed by Uzbekistan and Poland with eight tonnes each. “Central bank demand therefore remains an important long-term support factor for the gold price,” explains analyst Markus Blaschzok from the precious metals trader Solit Group.

With their purchases, central banks diversify their currency reserves and reduce dependence on the US dollar and other Western currencies. “In the past four years, central banks bought an average of around 1,000 tons of gold per year, about twice as much as the average for the previous decade,” says Blaschzok.

Demand from exchange-traded funds (ETFs) that invest their inflows in gold also increased, according to the World Gold Council. Ten billion dollars flowed into these products worldwide in September. Across the entire third quarter, inflows reached a record $31 billion. Demand was strongest in Europe and North America.

The purchases by central banks and ETFs stabilize the gold price, but they cannot stop the downward trend. Compared to its peak in January, gold lost more than 25 percent of its value in dollar terms.

The background is the rise in oil prices due to the Iran war, which is leading to rising interest rate expectations. These put a strain on gold because it does not generate any interest itself.

Blaschzok therefore warns that new buyers could exit disappointed if the downward trend does not stop. “The correction would subsequently strengthen,” he says.

Analysts at US Bank Bank of America write in their current analysis that the price of gold could fall towards $3,750 in the fourth quarter: “If the price of oil rises to $150 per barrel, gold could average just $3,500 per troy ounce next year.”

However, that is not their base case: “Ultimately, we believe that the medium-term outlook is positive given the US policy mix – including high deficits and rising debt.” The crisis currency gold generally benefits from rising national debt and the threat of currency devaluation.