Central bank gold buying spree continues, with diverging performance in domestic and international precious metal markets

Central bank gold buying heats up

Data recently released by the International Monetary Fund (IMF) shows that global official gold reserves totaled 35,664.5 tons by the end of July 2023. Of this, the Eurozone (including the European Central Bank) held 10,771.3 tons, accounting for 57.8% of its total foreign exchange reserves. Additionally, the latest data from the State Administration of Foreign Exchange shows that the People's Bank of China's gold reserves reached 2,165.4 tons at the end of August, an increase of approximately 28.9 tons from the end of July.

The World Gold Council (WGC) points out that following the resumption of net gold purchases by global central banks in June, the latest data shows that global official gold reserves continued to increase in July. Based on publicly available data from various central banks, global central banks' net gold purchases in July reached 55 tons. Looking at the detailed gold purchases and sales in July, the WGC notes two points worthy of attention: firstly, relatively few central banks changed their gold holdings in July; secondly, the amount of gold purchased/sold by those that did was quite significant.

The People's Bank of China once again became the largest official gold buyer, increasing its holdings by 23 tons in July, solidifying its position as the largest official buyer since the beginning of the year (126 tons). Since it began regularly publishing its gold purchase figures in November last year, the People's Bank of China has cumulatively net purchased 188 tons of gold, increasing its total official gold reserves to 2,136 tons, accounting for 4% of its total reserves.

The National Bank of Poland followed closely behind, increasing its holdings by 22 tons in July, bringing its total official gold reserves to 299 tons. This is the fourth consecutive month that the bank has made net gold purchases; during these four months, the National Bank of Poland purchased a total of 71 tons of gold, leaving only 29 tons to reach its goal of increasing gold reserves by 100 tons.

In July, the Central Bank of Turkey resumed gold purchases; after resuming net gold purchases of 11 tons in June, it purchased another 17 tons in July. However, due to significant sales from March to May, the Central Bank of Turkey is still in a net selling position year-to-date (-85 tons). At the beginning of August, Turkey restored import quotas for gold; therefore, if domestic gold demand remains strong, whether the Turkish central bank will sell gold again remains to be seen.

Meanwhile, other central banks that purchased gold in July include Qatar (3 tons), Singapore (2 tons), and the Czech Republic (2 tons). In addition, there were reports at the beginning of August that Russia would restart foreign exchange and gold purchases. Information on the subsequent scale of its gold purchases is scarce, so monthly figures will need to be observed to make a judgment.

Furthermore, the WGC stated that although central bank gold purchases still exceeded sales in July, the volume of sales was still considerable. The Central Bank of Uzbekistan (11 tons) and the National Bank of Kazakhstan (4 tons) were the only two central banks to significantly sell gold this month; these two central banks have also sold gold on several previous occasions. "Further sales by some central banks should not be overlooked, especially for central banks like the above two that purchase gold domestically. In fact, the National Bank of Kazakhstan has previously stated that it plans to further reduce its gold reserves by the end of this year."

Precious metal prices diverge in domestic and international markets

This week, due to the strong upward trend of the US dollar, international gold prices (1946.17, 3.47, 0.18%) were pressured and fell. London spot gold generally traded weakly in the range of $1914.8–$1946.3 per ounce, with a weekly decline of nearly 0.75%; London spot silver (23.30, 0.12, 0.54%) generally traded weakly in the range of $22.82–$24.29 per ounce, with a decline of nearly 4.7%. Looking at the domestic precious metals market, affected by exchange rate factors, Shanghai gold futures briefly hit a record high of 467.58 yuan/gram on Thursday, closing up 1.08% for the week at 466.84 yuan/gram; Shanghai silver fell 2.32% to 5777 yuan/kilogram.

Shi Jialiang, a precious metals analyst at Founder Securities Futures, said that this week, due to hawkish remarks from Federal Reserve officials, strong performance of the US August non-manufacturing PMI suggesting that expectations of a soft landing are rising, and the US initial jobless claims figures highlighting the resilience of the job market, the market's expectations of a soft landing for the US economy continued to rise, and expectations of another interest rate hike by the Fed in November also increased. Both the US dollar index and US Treasury yields performed strongly, with the US dollar steadily stepping above the 105 mark this week, reaching a six-month high.

The US August non-manufacturing PMI unexpectedly strengthened. The latest data from the Institute for Supply Management (ISM) shows that the August non-manufacturing PMI rose to 54.5, up from the previous value of 52.7, reaching a new six-month high. Gu Fengda, director of the research and consulting department at Guosen Futures, said that this data further indicates the persistent strength of consumer demand and the overall economy, and enhances the possibility that the US can avoid a recession. The strong non-manufacturing PMI also increased the market's expectation of the probability that the Fed will raise interest rates again in November. After the release of this data on Thursday, the US dollar index quickly rose to 105.

At the same time, the number of initial jobless claims in the US fell for the fourth consecutive week, reaching its lowest level since February. Data released by the US Department of Labor shows that the number of initial jobless claims in the week ending September 2 was 216,000, below market expectations of 235,000 and the previous value of 228,000, reaching a new low since the week ending February 11, 2023, and marking the fourth consecutive week of decline. In addition, the number of continuing jobless claims in the US in the week ending August 26 was 1.679 million, also below market expectations of 1.715 million and the previous value of 1.725 million.

Market views suggest that the further decline in initial jobless claims last week in the US indicates that while the US job market is cooling, the number of layoffs remains low. While a positive labor market may support the economy, it also increases the uncertainty of the Fed's future policy path. With the recent release of several strong economic data points, the market is beginning to worry that the Fed will be more hawkish than expected. According to data from the CME Group's FedWatch tool, the vast majority of traders still bet on inaction this month, with a probability of 93%, but the probability of a further interest rate hike in November once rose to over 43%.

The precious metals research team at Jinrui Futures stated that the recent weakening of precious metal prices is mainly due to the tightening of market liquidity. On the one hand, the US economy is currently relatively resilient, with most of the economic and employment data released this week exceeding market expectations, and the remarks made by Fed officials this week remain hawkish, leading to repeated expectations of policy tightening; on the other hand, it is due to the US Treasury's unexpectedly large bond issuance recently, while demand for US Treasuries is weak and ratings have been downgraded, causing US Treasury yields to rise strongly and pushing the US dollar index back to its high since March 2023. Under the pressure of tightening liquidity, precious metal prices have been under pressure recently.

In the short term, they believe that precious metal prices may remain volatile, and opportunities for low-position allocation of silver can be considered. "Currently, there is still pressure on US inflation, and expectations of Fed interest rate hikes may fluctuate. The US dollar and US Treasury yields are expected to remain strong in the short term, and gold and silver prices are expected to face some pressure. However, considering the long-term background of a slowdown in the US economy and the fermentation of risk aversion, the downside space for precious metal prices is also limited, especially since silver prices have entered a low range, and opportunities for low-position allocation can be considered. The next step is to closely monitor the US CPI data to be released next week to judge the possible direction of Fed policy."

However, they also stated that they will always be optimistic about the long-term investment value of precious metals. The current trend of the end of interest rate hikes in Europe and America and the economy entering a downward cycle remains unchanged. The risk of a hard landing of the US economy under a high-interest-rate environment still exists, and risks such as commercial real estate and banking crises have not been completely cleared, and there is still a risk of further defaults in the future. Therefore, the price of precious metals is still supported structurally. They predict that with the formal end of the Fed's interest rate hikes and the continued increase in economic recession pressure, driven by market risk aversion and expectations of policy easing, gold and silver will still have a chance to achieve better returns in the long term.

Shi Jialiang finally concluded that the expected adjustment pace of the Federal Reserve's monetary policy and the expected economic recession will continue to dominate the precious metals market, while it is also necessary to pay attention to the impact of sudden geopolitical events and systemic risks in the banking system. "In the early stage, although there was uncertainty in the Federal Reserve's monetary policy and the expectation of an economic recession heated up, precious metals showed a rebounding trend, but we have always emphasized that the possibility of a significant further increase in the short term is low, and the current precious metals market is still in an adjustment period. Subsequently, with the shift towards policy easing, the risk of economic downturn, the further narrowing of the US-Europe policy gap, and the continued central bank gold purchases, the strong trend of precious metals will continue." he said.