U.S. banking turmoil sparks gold frenzy in central banks

Gold prices have breached the $2,000 per ounce mark and continue to edge closer to all-time highs.

Central banks boost gold reserves

In the first quarter of 2023, central banks added 228 tons of gold to their reserves, the highest rate of purchases recorded since the data series began in 2000.

Despite this surge, it was a slower rate compared to recent quarters. Louise Street, senior market analyst at the World Gold Council, mentioned that gold’s role as a diversification asset and its long-term value retention have been key factors in central bank purchases.

Street also noted that gold’s importance has increased due to its performance during times of crisis. Although the WGC anticipates a moderation in central bank demand this year, it highlights that more developed financial centers are now showing increased interest in gold.

The Monetary Authority of Singapore (MAS) was the largest single buyer in Q1, adding 69 tons of gold to its reserves, now 45% higher than at the end of 2022.

The People’s Bank of China (PBoC) acquired 58 tons, bringing its total gold reserves to 2,068 tons or 4% of the global total. Turkey and India’s central banks also increased their gold reserves by 30 tons and 7 tons, respectively.

Chinese consumers bought 198 tons of gold jewelry in Q1, accounting for 41% of the global total. However, high and volatile prices in India led to the weakest Q1 demand in three years. Overall, jewelry demand remained relatively flat during the period.

Street observed a noticeable spike in gold investment demand in March, following the collapse of Silicon Valley Bank and subsequent failures in the U.S. banking system among regional institutions exposed to higher interest rates.

Gold-backed ETF inflows in March, driven by fears of systemic risk in the U.S. economy, helped counterbalance outflows from the first two months of the year.

U.S. and European market shifts

Bar and coin demand increased 5% year-on-year to 302 tons, with notable shifts in key markets. U.S. demand reached its highest quarterly level since 2010 due to recession fears and a flight to safety amid banking turmoil.

In contrast, European demand, particularly in Germany, weakened significantly due to positive real interest rates and a rising euro gold price, which prompted profit-taking among investors.

Street reported that the WGC is witnessing continued inflows in North America at the beginning of Q2, which are now extending to Europe.

She explained that the mixed picture of gold demand is a result of various factors such as high and rising gold prices, the mini banking crisis in March, continued high inflation, and concerns around global economic recovery.

Total gold supply increased by 1% year-on-year, driven by a first-quarter record high in mine production of 856 tons and higher recycling of 310 tons.

The diverse sources of demand for gold and its reaction to various factors make it an excellent strategic diversification asset, according to Street.