[Author: Gianni Zhang, Advisor: Zhijian Jiang]
Figure 1: Bottarelli, M. (2024, October 24). Il segreto di Pulcinella dietro il rialzo di oro e argento. IlSussidiario.net. https://www.ilsussidiario.net/news/spy-finanza-il-segreto-di-pulcinella-dietro-il-rialzo-di-oro-e-argento/2763760/
Gold has shown an impressive performance in the first nine months of the year, with gains of +28.1%, +27.2%, and +28.3% in US dollars, Euros, and Swiss Francs, respectively. Year-on-year, the results are even more remarkable, with increases of +42.3%, +35.0%, and +31.1% as of the end of September. These figures naturally prompt the question: has gold’s price reached its peak, or is it in a bubble, similar to the early 1980s, with a major correction looming? What we can surely assume is that there are several factors that influenced gold performance.
Gold demand driven by Central Banks
In 2024, gold has emerged as one of the top-performing global assets, with central banks playing a significant role in driving demand. Notably, central banks from China, Turkey, and India collectively added over 1,000 metric tons of gold in both 2022 and 2023, a trend that has continued into this year, according to the World Gold Council’s June 2024 Central Bank Gold Reserves report.
In the first quarter of 2024, global official gold reserves grew by 290 metric tons, marking the largest first-quarter increase since 2000 and exceeding the five-year quarterly average by 69%. In May, central banks reported additional purchases totaling 10 metric tons, as noted by the International Monetary Fund (IMF).
In Q2/2024, central banks displayed varied approaches to gold accumulation: while China significantly slowed its purchasing pace, India noticeably accelerated. India increased its gold reserves by 18.7 tonnes in Q2/2024. This follows a similar increase in Q1/2024, resulting in a 4.6% rise in India’s reserves within just six months. Poland’s central bank has also been accumulating during the past year and it now holds 420 tonnes in reserves, surpassing the UK and signaling an eastward shift in Europe’s economic balance.
Interest rate cut cycle impact to gold
Figure 2: Polymarket. (n.d.). What price will gold close at in 2024? Polymarket. Retrieved October 31, 2024, from
https://polymarket.com/event/what-price-will-gold-close-at-in-2024?tid=1730396589868
Months ahead of the FED meeting, predictions markets were already expecting a rate cut before the end of 2024 with probabilities ranging from 40% up to 80% for a 25 bps rate cut and around 20 – 35% for a 50 bps rate cut. On Wednesday, September 18, the Federal Reserve made headlines by cutting interest rates for the first time since July 2019, with a surprising reduction of 0.50 percentage points. The last times such a significant rate cut was made were in January 2001 and September 2007, both during periods of economic distress. This new phase of rate cuts is expected to support an increase in gold prices, as has been the case in each of the three previous rate-cut cycles since 2000.
During the 2019/2020 rate cut phase, factors such as a slowing US economy, the trade dispute with China, and the onset of the COVID-19 pandemic saw gold prices rise by more than one-third, from USD 1,400 to around USD 1,900.
Figure 3: Durden, T. (2024, October 31). 5 reasons why the gold rally is not over yet. ZeroHedge. https://www.zerohedge.com/precious-metals/5-reasons-why-gold-rally-not-over-yet
Geopolitical tensions remain high
The war in Ukraine has now been ongoing for over 2½ years, while tensions in the Middle East also escalated in late September following Israel’s substantial attacks on top Hezbollah figures and the ground invasion of Lebanon. The risk of a larger-scale conflict looms heavily over these two regions, like the sword of Damocles.
This increasingly unstable geopolitical landscape is reflected in central banks’ balance sheets. Massive gold purchases by central banks since 2009, coupled with rising gold prices, have led to gold comprising a larger share of global international reserves at the expense of fiat currencies. By the close of 2023, gold will have surpassed the euro in global reserves, making it the second-most held reserve asset by central banks, with the US dollar still holding the top spot. However, the dollar’s share in FX reserves has dropped below 60%, down from two-thirds in 2015. The upcoming BRICS summit in Kazan (Russia) from October 22-24 may indicate whether the shift away from the US dollar will accelerate and whether gold, as a neutral reserve asset, will see an additional surge in demand driven by geopolitical factors.
China and Gold Rise
Gold, commonly viewed as a safe investment in times of geopolitical and economic instability, has seen a significant surge in value following Russia’s invasion of Ukraine and the conflict in Gaza. However, its sustained rise above $2,500 per ounce has been more enduring, largely driven by factors emerging from China.China’s central bank plays a crucial role in this trend. In March, the People’s Bank of China (PBOC) boosted its gold reserves for the 18th consecutive month, making China the world’s largest central bank purchaser of gold in 2023, with its highest accumulation in nearly five decades.
Despite its previously strong demand for gold, China recently slowed its purchases, with the PBoC reporting no increase in gold reserves in June, marking the second consecutive month at a stable 2,264 tonnes, or 4.9% of total reserves. Given the significant price increases seen this year, J.P. Morgan noted that central banks may shift towards “structural” gold buying, adopting a “more tactical” approach to price movements.
Historically, China increased its gold reserves using domestic renminbi; however, the central bank has now shifted to purchasing gold with foreign currencies, according to Guan Tao, global chief economist at BOC International. This strategic change helps China reduce its exposure to the U.S. dollar and other major currencies. “China is unquestionably driving the price of gold,” remarked Ross Norman (2024), CEO of London-based MetalsDaily.com. “The flow of gold to China has gone from solid to an absolute torrent.”
The PBoC’s substantial gold purchases could be viewed within the framework of its strategy to reduce its reliance on US-dollar reserves. These purchases align with Beijing’s long-term strategy to diversify reserve holdings and reduce reliance on the U.S. dollar. China has consistently lowered its U.S. Treasury holdings over the past decade, with its U.S. debt holdings dropping from $1.1 trillion in 2021 to around $768.3 billion by May 2024, according to official US data. This shift is unfolding amid rising US-China tensions, characterized by an intensifying trade war and US-led sanctions targeting both China and Russia, contributing to a marked downturn in relations between these economic powerhouses.
“The main motivation of the PBoC is to be less dependent on the US dollar and—in an extreme case—to be less susceptible to US sanctions,” Carsten Menke (2024), an analyst at Julius Baer. Menke (2024) anticipates that China’s reserve diversification strategy will persist, citing “the geopolitical tensions between China and the United States are unlikely to disappear anytime soon, independent of the outcome of the US presidential elections.”
China’s accelerated de-dollarization efforts are also tied to its commitments within BRICS+. This growing bloc has emphasized its goal of increasing trade and investment among member countries while prioritizing the use of local currencies in bilateral trade, reducing dependence on the US dollar. Additionally, ongoing discussions around a BRICS currency backed by gold may further explain recent robust gold purchases. The World Bank noted that by Q1 2024, central banks within BRICS+ collectively held nearly 17% of all gold held by central banks worldwide, with Russia, India, and China among the top ten global holders. Although no official announcement has been made about a new currency, speculation around a potential gold-backed BRICS currency continues to mount.
Despite China’s substantial purchases, gold still accounts for only 4.9% of the nation’s foreign reserves, compared to India, where nearly double that percentage of reserves is held in gold, showing a stronger emphasis on the metal within its strategy. “China’s gold reserves need to rise in absolute and relative terms because they do not match the status of the world’s second-largest economy, and gold’s share of its reserves is the lowest of any major economy,” a recent Reuters report stated.
Figure 4: Moss, J. (2024, August 14). What’s behind China’s gold-buying spree? International Banker. https://internationalbanker.com/banking/whats-behind-chinas-gold-buying-spree/
Alongside heavy central bank acquisition, retail demand for gold in China has surged, catching the attention of speculators on the Shanghai markets, where many are betting on the continuation of this upward trend. Reflecting this interest, the Shanghai Futures Exchange reported a more than doubling of average trading volume for gold in April compared to the same period last year.
As reported by the China Gold Association, gold consumption in China rose by 6% in the first quarter of 2024, following a 9% increase in the previous year. Gold has gained appeal as traditional investments have struggled to deliver returns. The ongoing crisis in China’s real estate sector—where most families typically invest their savings—alongside lingering low confidence in the stock market, has further driven this trend. Several large investment funds aimed at high-net-worth individuals have collapsed due to failed real estate investments, reducing available investment options. Consequently, capital has shifted into Chinese gold funds, with many younger investors even beginning to purchase small amounts of gold as a safe alternative.
Kessel ,A., July 02, 2024, Gold Shines So Far in 2024 as Central Banks Invest Heavily, https://www.investopedia.com/gold-shines-so-far-in-2024-as-central-banks-invest-heavily-8672711
Zhou, L., May 04, 2024, 一口气了解黄金 | 为什么暴涨? 投资黄金需要注意什么? ,https://www.youtube.com/watch?v=B4jIyufgy-s
Daisuke Wakabayashi & Claire Fu, May 05 2024, China Is Buying Gold Like There’s No Tomorrow, https://www.nytimes.com/2024/05/05/business/china-gold-price.html
Holm, S., March 01, 2024, 2024 Gold Price Forecast: Expert Analysis and Predictions, https://www.morpher.com/blog/2024-gold-price-forecast
Wang, F., Oct 12 2024, Gold Performance and how much will gold price increase in Q4, https://www.markets.com/news/gold-performance-2024-and-how-much-will-gold-price-increase-in-q4
Durden, T., Oct 17, 2024, 5 Reasons Why The Gold Rally Is Not Over Yet, https://www.zerohedge.com/precious-metals/5-reasons-why-gold-rally-not-over-yet
VBL, May 16, 2024, Gold: China Correlations Matter, https://www.zerohedge.com/news/2024-05-15/unlocked-gold-correlates-china-rates
Moss, J., Aug 14, 2024, What’s Behind China’s Gold-Buying Spree?, https://internationalbanker.com/banking/whats-behind-chinas-gold-buying-spree/
0 Comments