Bars of 99.99 percent pure gold are placed in a workroom at the Krastsvetmet precious metals plant in the Siberian city of Krasnoyarsk, Russia, January 31, 2023.
Alexander Mansyuk | Portal
Gold demand surged to an 11-year high in 2022 on “colossal central bank buying, supported by vigorous buying by retail investors,” according to the World Gold Council.
Annual gold demand rose 18% for the year to 4,741 tons (excluding over-the-counter or over-the-counter trading), the highest annual figure since 2011, fueled by record fourth-quarter demand of 1,337 tons.
Key to the rise was a 55-year high of 1,136 tonnes bought by central banks during the year, the industry-backed group revealed, noting that the majority of those purchases were “unreported”.
This was a 152% increase from 2021, when central banks bought just 450 tonnes of gold and the World Gold Council attributed the surge to geopolitical uncertainty and high inflation.
“Net central bank purchases in Q4 were 417t, bringing total purchases in H2 to 862t. Similar to Q3, data for the final quarter of the year was again a combination of reported purchases and a significant estimate for unreported purchases,” the WGC said.
“Should more information about this unreported activity become available, these estimates may be revised.”
Investment demand for gold rose 10% to 1,107 tons, while holdings in gold ETFs (exchange traded funds) saw smaller outflows in 2022 than a year earlier.
Jewelry consumption fell 3% to 2,086 tonnes in 2022, with much of the weakness centered in the fourth quarter as gold prices rose.
Total annual gold supply rose 2% to 4,755 tonnes in 2022, with mine production hitting a four-year high of 3,612 tonnes.
Central bank bulk purchase
“This has been a stellar year for central bank purchases: 2022 was not only the thirteenth consecutive year of net purchases, but also the second-highest level of annual demand since records began through 1950, boosted by +400t demand in both the third and third fourth quarter,” the WGC said.
The group’s annual survey of policymakers found that the top reasons for holding gold were its “performance in times of crisis” and its “role as a long-term source of value.”
“Therefore, it is hardly surprising that in a year marked by geopolitical uncertainty and runaway inflation, central banks have opted to continue to fill their coffers with gold at an accelerated pace.”
The majority of central bank purchases in 2022 came from emerging markets, with the central bank of Turkey being the biggest buyer with a record 542 tons. China, India, Egypt, Qatar, Iraq, the United Arab Emirates and Oman all significantly increased their gold reserves over the year.
“It could be different this time”
Despite a difficult backdrop of rapid rate hikes and a strong US dollar for much of the year, the fourth quarter’s rebound was enough to propel gold prices up slightly for 2022, with the precious metal posting a quarterly gain of 3% on a year-to-year increase of 0, 4%
Gold typically weakens during periods of rising interest rates and a strong dollar, in part because it’s priced in US dollars, although most demand comes from outside the US, Wells Fargo pointed out in a statement last week. This means the purchasing power of non-US buyers will be reduced and global gold demand will be impacted.
Wells Fargo’s head of real asset strategy, John LaForge, also noted that because gold is an interest-bearing asset, it becomes less attractive to institutional investors who can buy Treasuries and other interest-bearing assets when interest rates rise.
Gold started 2022 well, gaining 12% through March, but fell as the US Federal Reserve began aggressively raising interest rates to curb inflation, resulting in a stronger dollar and significant headwinds for the precious metal generated.
Spot gold prices are also up more than 5% so far in 2023, trading at around $1,926 a troy ounce as of Wednesday morning. LaForge said that while Wells Fargo is currently neutral on precious metals versus other commodities, it doesn’t necessarily expect the US banking giant to perform poorly.
Wells Fargo’s year-end target range remains $1,900 to $2,000, but LaForge said “this time might be different.”
“We may even need to increase our target range at the end of 2023 if the US dollar remains range-bound and we gain confidence that rate hikes are nearing completion,” he added.
Gold is becoming “very expensive” for consumers.
James Steel, chief precious metals analyst at HSBC, said rising prices could eventually dampen demand in 2023 as gold becomes “very expensive for consumers” given that around 70% of purchases are concentrated in emerging markets.
“Buying local – coins, bars, jewelry – is going to get increasingly expensive and that could at least contain the rally so I would certainly be cautious and HSBC’s camp is that the Fed will keep rates and not cut them in the second half of the year,” he said.
“If this is realized during 2023, it could also deprive the gold market of some oxygen.”