While there’s room for gold to move up, there are also factors that could curtail its strong run. Two stand out: central banks, and Asian investors.
Central bank demand has been a key driver of gold’s performance in recent years. We estimate that it contributed at least 10% to gold’s performance in 2023 and potentially around 5% so far this year. However, the People’s Bank of China (PBoC) has reported a deceleration in gold purchases over recent months, culminating in holdings that remained unchanged at the end of May.
This, combined with notable sales, has raised questions as to whether demand from the official sector may lose momentum. But we still expect central bank demand to remain above trend this year, a view that is shared by Metals Focus in their most recent Gold Focus report.
While reported gross purchases may be lower than last year, gross sales have also decelerated, primarily due to the absence of the hefty Turkish sales we saw in early 2023. Given that central bank demand is often policy driven, timing is difficult to ascertain, but our recent central bank survey provides some reassurance: gold reserves managers believe they will retain their positive outlook towards gold.
Asian investors have also been important contributors to gold’s recent performance. This has been evident through bar and coin demand, gold ETF flows and, anecdotally, in the over-the-counter market.
In the past, Asian investors tended to buy on dips, but more recently, they have followed the trend. For example, we have seen meaningful AUM growth in both Indian and Chinese gold ETFs and gold’s move up in early Q2 coincided with a spike in volumes in Shanghai futures.
Chinese investor demand was partly supported by positive sentiment linked to central bank buying. So, while the fundamentals of gold ownership remain in place, the question is whether a pause by the PBoC may encourage profit-taking by more tactical investors.
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