PBOC announced another increase in its gold reserves in January. China joins the list of countries that are stocking up on the precious yellow metal, with the People’s Bank of China (PBOC) announcing yet another increase in its gold reserves in January, this time by 15 tonnes. Its total gold reserves currently sit at 2,025 tonnes, which is an all-time high. This trend of increasing central bank buying has been going on since the second half of last year, with buying peaking in 3Q22 at a record high level of 400 tonnes. The motivation for this is multi-fold, but one of the key reasons is undoubtedly to de-risk vis-à-vis the dollar and dollar assets in favour of a more ‘neutral’ store of value that is not cuffed to any individual economy and has the added benefit of being resilient in the face of geopolitical and financial crises. With gold already quoted in yuan and China having its own gold exchange in the form of the Shanghai Gold Price Benchmark, it is reasonable to believe that there are ambitions to create a ‘gold yuan’, similar to how it has been pursuing the petro-yuan. Furthermore, with gold accounting for only 3.7% of the country’s FX reserves (Figure 1), China will have plenty of ammunition for further gold purchases in the future should it want to extend its gold buying streak. Together with China, countries that have been hoarding gold in recent quarters such as Turkey and Kazakhstan, should continue to provide support for gold from a fundamental demand perspective.
Figure 1: China has been steadily increasing gold reserves since 2015
Source: Bloomberg, DBS
For now, gold will remain largely driven by the dollar. Gold carried its strong performance from the last quarter of 2022 into the new year, hitting a nine-month high of USD1,950 on 1 February 2023. This stellar run was largely on the back of a weakening dollar, which bolstered safe haven demand for the precious metal, and strong central bank buying over the past two quarters. Following this rally however, gold price pulled back sharply after a spectacular jobs report for January, which saw the US economy add 517,000 new jobs (vs. estimates 189,000), and higher-than-expected inflation of 6.4% (vs. estimates 6.2%). This series of macroeconomic data print releases derailed hopes of a dovish pivot by the Fed for the near/medium term and re-materialised support for the dollar and treasury yields.
Long-term constructive on gold. Headwinds aside, we remain constructive on gold on balance given the favourable conditions, including the softening dollar and expectations of a less-aggressive US rate trajectory this year compared to 2022. Structural trends favouring central bank buying should also prove supportive of gold prices in the longer run.
Additionally, we continue to advocate for gold as a risk diversifier, given its low correlation with bonds and equities, in a holistic and balanced portfolio. Gold has also demonstrated resilience during past financial crises, so holding gold will add overall resilience against black swan events. Investors can gain exposure to gold via the following expressions: i) physical gold; ii) gold futures; iii) ETFs and managed funds on physical gold and gold mining equities; or iv) direct holdings in gold mining equities, which are essentially a leveraged expression of gold.
Figure 2: Gold’s decline in Feb was driven by strengthening dollar
Source: Bloomberg, DBS
Figure 3: Central bank demand remained high after record 3Q22
Source: Bloomberg, DBS
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