Gold’s latest allure? It’s sanctions-proof

Gold bars are displayed at a shop in downtown Kuwait City. The price of gold hit a record high on May 20, as the shock death of Iranian President Ebrahim Raisi in a helicopter crash boosted support for the precious metal seen as a haven investment. AFP (AFP)
Gold bars are displayed at a shop in downtown Kuwait City. The price of gold hit a record high on May 20, as the shock death of Iranian President Ebrahim Raisi in a helicopter crash boosted support for the precious metal seen as a haven investment. AFP (AFP)

Summary

Buying from central banks, particularly from China, can keep the gold rally going even if anxious individual investors don’t jump in.

Gold is having its moment. Geopolitical hedging from global central banks could keep it shining.

Now at its highest level ever, above $2,400 per troy ounce, general jitters about the world alone can’t explain gold’s strength. The yellow metal got a boost following the death of Iran’s president this week, for example, but it has been on a tear over the past two years, appreciating 33% since the end of 2022.

The rally has defied some typical headwinds. Prices have surged this year even though real interest rates have also picked up: Yields on 10-year U.S. inflation-protected Treasury securities have risen by around 0.37 percentage point in 2024. Gold typically moves in the opposite direction of real yields since it doesn’t generate any income and higher-real rates make it less attractive to hold.

And, notwithstanding trends like Americans buying tiny gold bars at Costco, retail investment demand for gold also hasn’t provided much support: Gold-backed exchange-traded funds have seen net outflows for three consecutive years.

The big buyers behind gold’s rally? Global central banks, especially those in emerging markets. Central banks have added around 2,200 tons of the metal since the third quarter of 2022, according to the World Gold Council—an increase of nearly $170 billion at current prices. Central bank net purchases now account for more than a fifth of global gold demand or about twice the proportion between 2012 and 2021.

The likely trigger? Western sanctions on Russia after it invaded Ukraine in 2022 might have prompted some central banks to diversify away from dollar-based assets. Russia’s roughly $300 billion in international reserves were frozen and there has even been talk of using the income on them to help defend or rebuild Ukraine. Featuring prominently in Russia’s reserves before and especially after the invasion: gold, which is easy to stockpile beyond foreigners’ reach.

Most gold buying from central banks isn’t reported, but among the purchases that have been, six central banks, including China, India and Turkey, have driven all the net buying since mid-2022, according to Goldman Sachs.

China’s central bank, in particular, has been buying gold for 18 straight months since November 2022, boosting its gold reserves by 16%, or 10 million troy ounces. China’s economy is much larger and more important to the world than Russia’s was in 2022, which would make imposing sanctions tougher if it invaded Taiwan. A direct military conflict with the U.S. would be a different matter.

Clearly, China can’t move all of its $3.4 trillion in reserves into bullion, but increasing its exposure to gold could move the market quite significantly. Gold was approaching 5% of China’s total reserves as of April—a rise from around 3% in 2022. If China allocates just 1% more of its reserves into gold, that would be equal to around 9% of total global supply last year, using current prices.

Ongoing geopolitical tensions between China and the West should keep gold bugs happy.

Write to Jacky Wong at jacky.wong@wsj.com

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