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After reaching a high of $2,427 per ounce in mid-May, gold prices plummeted sharply in a single day, marking the steepest decline in over 3.5 years. The drop was triggered by news that the Chinese central bank was pausing its gold purchases.
Central bank purchases play a significant role in the gold market, with China being a major player. Over the past two years, record purchases by central banks have driven gold prices from a low of $1,631 per ounce in October 2022 to the peak seen in May.
In 2022 and 2023, central banks bought record quantities of gold as they sought to add the metal to their reserves, replacing the US dollar. Nearly half of all gold consumed during these two years was purchased by central banks, with China buying 225 metric tonnes, or approximately 20 percent of all central bank purchases in 2023.
According to a survey by the World Gold Council, central banks are expected to continue buying gold over the next five years. The survey, which included responses from 70 central banks, indicates that expectations for continued gold purchases are at their highest level since the survey began in 2018.
None of the surveyed banks anticipates a decline in central bank gold buying, while 81 percent expect an increase. The survey also revealed interesting insights into the reasons behind these purchases. Seventy-one percent of respondents cited gold's legacy as a reason to hold it, 88 percent highlighted its long-term value, 82 percent pointed to its performance during crises, and 76 percent emphasized its role as an effective portfolio diversifier.
Increased central bank buying signals a growing expectation of heightened uncertainty. According to the survey, 86 percent of respondents express concerns about systemic risk.
Regardless of the underlying reasons, gold purchasing is anticipated to continue in the future. Media reports suggest that China is likely to resume buying as prices decline. Currently, China holds 2,264 tonnes of gold, accounting for 4.9 percent of its total reserves—the highest amount to date.
Gold prices have also been bolstered by indirect Chinese buying. Over the past six months, Chinese investors have significantly increased their investments in Gold Exchange Traded Funds (ETFs), pushing gold investment to a record high of 87 tonnes. This trend has emerged as the real estate sector in China has faltered, prompting a steady rise in gold investment.
However, as gold prices climb due to central bank purchases, retail buyers are increasingly shying away from the market. ICRA projects that jewellery consumption growth in volume terms will contract in FY2025. In FY2023 and FY2024, volume growth was a mere two percent and four percent, respectively. The sharp rise in gold prices is largely responsible for this decline in consumption.
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