Gold is now the most significant central bank asset after the dollar

Latest International Monetary Fund data shows that global central banks hold 1.16 billion ounces of gold worth $3.16 trillion.

John Maynard Keynes dubbed gold as the “barbaric asset”. But it now accounts for just under a fifth of global central banks’ gold and foreign exchange reserves. The IMF states that the US dollar’s share has steadily fallen during the past decade. But is still the prime reserve asset.

The US dollar accounts for $6.68 trillion or 43 percent or of global gold and foreign exchange reserves. It is followed by gold 20.4 per cent of worldwide $ 15.5 trillion reserves. The euro is next with14.7 per cent of the total, then Japanese yen 4.2 per cent, British pound 3.7 per cent, Canadian dollar 1.9 per cent, Australian dollar 1.7 per cent and China’s renminbi 1.6 per cent.

Gold’s share of central bank reserves has risen because central banks have bought 305 million ounces in the past 15 years. And, of course, the price has soared to an all-time peak of US$2720.

The price is exceedingly volatile so gold’s proportion of global central bank reserves is bound to vary in coming weeks and months. Regardless if the quote stays north of $2,000, it will remain the second most significant official reserve asset.

Gold has not only done well because China, Russia, Turkey and other central banks bought large quantities in the past few years. Investors fear that Israel’s war against Iran’s surrogates Hezbollah, Hamas and Houthis, will escalate. Iran is already despatching missiles. The Ukraine war, sanctions against Russia and US tension with China have also helped bullion. Interest rates have begun to fall and in recent weeks a weaker dollar has also boosted gold.

Exceedingly difficult to predict future prices

At the beginning of the year the London Bullion Market Association surveyed more than twenty precious metals dealers and analysts. Only one predicted $2,500 an ounce and a handful $2,300. But momentum is taking hold and Swiss banks such as UBS and Lombard Odier have been recommending gold for long term investors.

Cautious analysts such as Jeffrey Christian of precious metals consultancy CPM wonder if the above factors are already baked into the price.  He observes that central bank treasurers are price sensitive. After gold began its 34 per cent price surge from just under $2,000 an ounce in February central banks began to cut their purchases, Christian says. Some central banks, including the Singapore Monetary Authority, began to take profits when gold shot past $2400 an ounce.

Other analysts such as Ross Norman, CEO of Metals Daily, are concerned about the extent of speculation in New York and Shanghai.

The Commodity Futures Trading Commission estimates that hedge and commodity funds have begun to cut their bull positions in futures and options. As at 22 October 2024 they are still equivalent to 24.2 million ounces on Comex, the New York exchange. This is 16 per cent of global demand in the past twelve months. Including other speculative positions on Comex, the total is 29.5 million ounces. That is almost  a fifth of annual gold consumption.

Over and above the above speculative positions are massive futures and options trading and holdings on the Shanghai Futures Exchange Norman warns.  Chinese news agencies contend that at least three major Chinese commodity firms have been heavy buyers. They bought highly leveraged call (bull) options. Bullion houses that sold these options had to cover themselves and bought gold futures to hedge against potential losses. Their actions caused prices to rise further. The question is when will the roller coaster come to a halt.

In the meantime, jewellery firms and in India, Hong Kong, Taiwan, Singapore and elsewhere are under acute pressure. They are doing their best to counter the steep price in their golden raw material. They are adjusting the mix between gold and much cheaper silver and platinum in their designs. Consumers are resisting higher prices and cutting purchases.

As a result the global jewellery industry has slashed purchases of gold, according industry sources.

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