Central banks, one of the key participants in driving investment demand for gold, cut their purchase in the first half of this calendar year (H1 2020). The World Gold Council’s (WGC) latest demand trends report showed that global central banks bought 233.4 tonnes of gold on a net basis, 39% lower on a year-on-year basis. Also, this number is 6% lower than the 10-year H1 average of 247 tonnes.
Global economic uncertainty has massively increased investors’ appetite for safe-haven asset gold. In the first half of the year, this precious metal nearly 17% returns in the international market. In the same span, the MSCI World Index, down 7%. On 29 July, gold prices hit an all-time high intraday USD1981/ounce. Gold prices are expected to rise further aided by gloomy economic recovery outlook and historically low-interest rates worldwide.
“The World Gold Council said that buying has become more concentrated with fewer banks adding to reserves in 2020. We feel that one deterrent for the central bank was prices. In the first half of 2019, gold prices were quoting around $1350/ounce on an average, while in H1 of 2020, average gold prices were around $1700/ounce," Sriram Iyer, senior research analyst at Reliance Securities Ltd. It should be noted that global central banks purchased a record of 385.7 tonne of gold in H1 2019.
The report highlights that the second quarter marked the first quarter since Russia – a major gold buyer since 2014 – suspended its gold purchasing. Further, in the June quarter, purchases were also more concentrated than seen in recent years. During the quarter, six central banks increased their gold reserves by a tonne or more. This compares with an average of nine over the last 12 quarters, the report said.
Tapan Patel, senior analyst for commodities at HDFC Securities Ltd is of the view that a temporary pause in gold buying from central banks is likely as many nations may sell some of the gold to tackle the current economic slowdown. “The major central banks from the world have bought record gold in the year of 2019, which was the highest in 50 years. The exhausted limit of gold buying from most of the central banks has resulted in a slowdown in H1 2020," he added.
Turning to net sales, the first half of the year saw a rise in the number of banks reducing their gold reserves by a tonne or more compared to the same span last year. This comparison here is seven versus two. But despite this, the absolute volume of gold being sold during H1 2020 was modest at 42.5 tonnes.
Considering that global economic recovery would be prolonged, the WGC expects central banks to remain net purchasers in 2020, mainly due to negative interest rates. However, volumes could be below those of the two preceding years.