Gold got a boost of EMCB buying after US sanction on Russia

·         Although under Trump, overall geopolitical tensions may reduce, EMs may still diversify from USD to Gold to some extent to reduce any US sanction risk

Gold is now one of the best-performing financial assets in the last 20 years, having grown almost 480% from around $423 in Jan’2005 to the recent high of around $2450 in May’24; i.e. almost 25% per year on average. This is far higher than cumulative growths of around +42% over the prior 20 years (1985-2004) when Gold gained from around $307 to $450 high and closed around $438 (Dec’2004); i.e. just over +2% per year on an average, underperforming almost all other risk or even safe-haven assets. But Gold is now competing with other risk assets and even outperforming benchmark equity indices such as the S&P 500, which grew around +350% during 2005-24 (YTD).

The phenomenal growth in Gold is primarily due to its appeal as a traditional inflation hedge and haven asset amid increasing 3Ds (deficits, debts, and devaluation) and resultant elevated inflation, especially after 2007 GFC, followed by various periodic global or even local (US) financial/economic and geopolitical crisis like 2010 European debt crisis, then the cycle of QE/QQE/QT, late 2019 money market crisis (REPO tantrum) followed by 2020-22 global COVID crisis, the deluge of synchronized global monetary & fiscal stimulus-continuation of 3Ds.

Also, the Russia-Ukraine war from late Feb’22 as a result of US (Biden admin) provocation and subsequent US/EU sanction/freezing actions on Russian financial assets in USD/EUR is causing some types of alarm among not only Russia-China (so-called US enemies) but also comparatively US friendlier nation like India. Most of the EM central banks having adequate USD/EUR/FX holding (reserve) are now on a gold buying spree to diversify their reserve to gold to some extent and thus Gold is now trading like a volatile risk asset contrary to the earlier narrative primarily due to huge buying and selling by global/EM central banks.

Gold is also being affected significantly by Fed rat actions and 24/7 jawboning to keep bond yields under control (backdoor YCC). Looking ahead Fed is expected to start an eleven-rate cut cycle from Dec’24 till Dec’27, which may also boost Gold to some extent over the longer term despite regular volatilities (on both sides of the trade).

Gold also wobbled on hopes & hopes of an imminent Gaza war ceasefire and Israel’s plan/action of an all-out offensive on Hezbollah in Lebanon. Also, Russian President Putin’s narratives about the fate of the Ukraine war and any use of Russian nukes against NATO/US (?) triggered some movement in Gold on both sides of the trade.

Finally, Gold, which was stumbled last week from around $2390 to almost $2290 after a report that China/PBOC may be slowing down on sovereign buying coupled with a hawkish hold by the Fed. But Gold again got some boost from Central Bank buying after a favorable report from the World Gold Council and another report that the Thailand Central Bank is now again very active on a Gold buying spree to diversify from USD assets.

Although Gold surged almost $70 from around $2300 to $2370 soon after the ‘Thailand’ gold buying headline Thursday, it stumbled to almost $2315 by Friday closing after hotter than expected S&P Global PMI data, which may help the Fed to have the ‘wait & watch’ stance till at least Dec’24. But in a broader sense, Gold may continue to be boosted by the 3Ds and EM central bank net buying interest even after the Russia-Ukraine war ends and the Gaza war ceasefire may be attained before the Nov’24 US Presidential election. The US Treasury may now not only have access to some portion of Russian USD/Gold assets but also that of Ukraine and even Israel instead of providing war grants.

The World Gold Council's recent reports highlight a significant increase in gold purchases by EM central banks in 2024, continuing the strong trend seen in previous years. In Q1CY24, global/EM central banks added 289.7T of gold to their reserves, contributing to a total gold demand of 1,238T, which is a 3% Y/Y (annual) increase.

In 2023, the People's Bank of China (PBOC) has been a major buyer of Gold, adding 103T to its reserves in H1CY23, extending its buying streak to eight months. Other major EM CB buyers were the Monetary Authority of Singapore and the National Bank of Poland, which added 73T and 48T respectively during the same period​.

But there were also corresponding CB sales as well, primarily from the Central Bank of Turkey, which sold a substantial gold in response to domestic market/economic conditions but resumed buying in Q3CY23​. This dynamic buying and selling indicates timely/tactical maneuvers rather than strategic shifts in gold policies by these EM central banks. Overall, central bank gold demand remains robust, driven by Gold’s safety (haven appeal), liquidity, and age-old real return characteristics (inflation-adjusted).

Central Bank Gold Buying Picks Up in April’24: As per World Gold Council and other reports

·         Net Purchases: Global gold reserves rose by a net 33T in April, similar to levels seen in February’24

·         Gross Purchases and Sales: Gross purchases dipped to 36T, while gross sales saw a significant drop from 36T to just 3T in April’24

·         Major Buyers: Eight central banks increased their gold reserves by a tonne or more in April. The Central Bank of Turkey was the largest buyer, adding 8T to its official reserves; other notable buyers included the National Bank of Kazakhstan, Reserve Bank of India (RBI), National Bank of Poland, Monetary Authority of Singapore, Central Bank of Russia, and Czech National Bank

·         Broad buying from several EM banks offset negligible sales

·         Central Bank Gold Demand Trends: 2023: Central banks maintained their momentum in gold buying, adding 1,037T to global official gold reserves. This is just short of the record set in 2022 of 1,082T. The PBOC was the largest single buyer, adding 225T to its gold reserves

Central Bank Gold Demand Remains Healthy

·         YTD Net Purchases: Central banks have been consistent net buyers for 11 consecutive months, with a total net purchase of 38T in 2024 (YTD). This has lifted the total official gold holdings to 578T

·         People's Bank of China (PBOC): The PBOC reported a significant slowdown in its gold buying, with a monthly increase of just under 2T in April. This is the lowest monthly increase since it resumed reporting in November 2022

Central Bank Gold Survey 2024

·         Findings: An increasingly complex geopolitical and financial environment is making gold reserves management more relevant than ever. In 2023, central banks added 1,037 tonnes of gold – the second-highest annual purchase in history – following a record high of 1,082 tonnes in 2022

·         Following these record numbers, gold continues to be viewed favorably by central banks as a reserve asset. According to the 2024 Central Bank Gold Reserves (CBGR) survey, which was conducted between 19 February and 30 April 2024 with a total of 70 responses, 29% of central bank respondents intend to increase their gold reserves in the next twelve months, the highest level we have observed since we began this survey in 2018

·         The planned purchases are chiefly motivated by a desire to rebalance to a more preferred strategic level of gold holdings, domestic gold production, and financial market concerns including higher crisis risks haven assets) and rising inflation (long-term store value/inflation hedge); effective portfolio diversifier; no default risk; higher liquidity even at times of crisis; concerns about US sanctions by US ‘enemy’ nations

·         No significant effort by global central banks as a part of any so-called de-dollarization policy (at least publicly surveyed)

·         Central Bank Gold Outlook: 29% of central banks expect to add more gold to their reserves over the next 12 months, and 81% anticipate an increase in official sector gold reserves overall

·         Central banks view gold as a long-term store of value and a safe-haven asset, particularly during times of crisis. The survey also noted a growing optimism towards gold's future role in global reserves

·         There is no alternative SDR/GRC (Global reserve currency), that can replace King Dollar (USD)

·         Although EUR is an alternative to USD as GRC, it’s far away from the global demand for USD as a currency to settle global trade/transaction

·         As per the latest SWIFT data, almost 85% of global transactions are now settled in USD, followed by the Chinese Yuan around 6%, and EUR around 5%

·         There are various reasons for USD becoming the undisputed ‘King’ among GRCs: The largest vibrant Democratic economy in the world and also the safest as far as geopolitical risks are concerned; credibility in the Fed (monetary authority) along with other important institutions like Treasury, judiciary, and Congress/Parliament, etc and overall geopolitical and economic/macro stability of the US

·         USD is the most trusted GRC along with the highest liquidity

·         But the growing US geopolitical strategy to use USD as a weapon (economic sanction) against so-called enemy countries debarring from the global SWIFT/USD payment settlement system is also affecting USD

·         Also, losing monetary & fiscal policies to fight various economic crises (like COVID in 2020, and the GFC/Housing crisis in 2007) is also affecting USD amid the vicious cycle of  3D- higher deficit, higher debt, and higher devaluation of the currency (USD)

·         In that sense, the appeal of Gold is unique as the supply is limited compared to an almost unlimited supply of USD

·         Gold is a traditional physical asset in limited supply that may be seen as an inflation hedge

·         USD and also Yuan a growth currencies, while EUR and yen primarily carry trade currency

·         EUR/EU concept is not so popular among various EU/European economies due to various reasons including the concept of a common monetary authority controlling the supply of the currency against different/divergent fiscal authorities (states/countries/economies) having divergent fiscal requirements/management; thus we have seen Brexit, limiting appeal of GBP and also EUR

·         The increasing devaluation of the Japanese Yen (like an EM currency) due to various domestic economic issues is also boosting the appeal of Gold; the same is also true for the Indian INR

·         Chinese Yuan is being supported by China’s rapid economic growth backed by the highest/huge international trade and various strategic initiatives to increase the global economic influence of the 2nd largest economy in the world including the BRI (Belt and Road Initiative),  AIIB (Asian Infrastructure Investment Bank), development of a cross border payment system (an effective alternative of US/EU controlled SWIFT), and CBDC (Central Bank Digital Currency)

·         But China’s capital control, autocratic nature of the overall political system, and various geopolitical issues have also impacted/limited the growth/accessibilities of the Yuan as a replacement for USD in the world of GRCs

·         Overall, USD continues to dominate but faces potential erosion of dominance due to increasing weaponization (geopolitics) of the currency and various domestic economic challenges including 3D (deficit, debt, and devaluation)

·         Although, the EUR Plays a significant role but is also constrained by internal Eurozone dynamics and the fact that the EU also applies sanction rules on enemy countries like Russia in line with US policy

·         Thus Chinese Yuan is gaining importance, particularly in Asia and developing economies (EMs), but hindered by capital controls and geopolitical concerns

·         Recently, Russia sought to settle its oil export account with India through the Chinese Yuan as Russia also needs to pay China for its imports; Russia can’t use USD or EUR as a medium of common currency acceptable to all to settle its trade accounts die to US/EU sanctions for Ukraine war ‘sin’

·         The US/EU/G7 is also in the process of seizing/auctioning off various Russian assets in their custody (like USD/EUR treasuries and even some portion of Gold) to ‘pay’ for the Ukraine war bill (aid)

·         After this Russian incident, where the US is using USD as a financial weapon against Russia (enemy country), various other countries like China and even friendlier India are diversifying from USD assets to Gold to some extent and keeping that Gold in their custody rather than US/UK or any foreign custody

·         After the Russian incident, the global/EM trust in USD has diminished to some extent as the issuer US Treasury may deny settling US bond holding of any enemy countries in the future in the event of any unforeseen/unfortunate geopolitical event

·         But still, apart from actively US-sanctioned countries like Russia, and North Korea, almost all other countries prefer to settle international trade obligations in USD due to its universal acceptance/appeals

·         Thus, while the USD remains the dominant global reserve currency (GRC), having around 60% share, although the Euro and the Yuan are increasingly significant in global trade and finance, have still a low single-digit market share of around 5%

·         The Euro offers a strong alternative, especially within Europe and to some extent globally, while the Yuan’s role is growing, particularly in Asia and among developing countries (EMs); BRIC nations are now also planning common BRIC currency

·         The future landscape of global reserve currencies will likely be more multipolar, with these three currencies(USD, CNY, and EUR) playing pivotal roles, influenced by economic policies, geopolitical developments, and market dynamics, whereas EM central banks like China, India and also Turkey are increasing their Gold holdings gradually/rapidly to back/strengthen their currency

·         Although Gold is a big beneficiary of global geopolitical and economic risk, as a share of the Central Bank reserve, remains historically low despite increasing geopolitical/economic fragmentations

·         Economic Scenarios: The World Gold Council has explored three economic scenarios and their likely impact on gold. Historically, gold has performed well during times of economic uncertainty, and this trend is expected to continue in 2024

·         These reports highlight the ongoing trend of central banks increasing their gold reserves, driven by factors such as economic uncertainty and a growing skepticism toward the USD

At a glance, Global EM Central Banks have added around 1320T Gold to their reserves since 2021 led by China, India, Turkey, Poland, and Singapore, while the US, Germany, Italy, France, Russia, China, Switzerland, Japan, India, and the Netherlands are now world’s 10 largest gold holders followed by Turkey and Taiwan. Overall, Global central banks added around 330T of Gold per year from 2020 to Q1CY24 (last 4 years), while the average rate for the last 20 years (CY20-Q1CY24) is around 64T/Year.

Apart from China/PBOC, EM central banks like India, Turkey, Singapore, and even Thailand have been increasing their gold purchases in recent years due to several strategic and economic reasons:

·         Diversification of Foreign Reserves: EM central banks are diversifying their foreign exchange (FX) reserves to reduce reliance on the USD and other major currencies. By holding more gold, they aim to mitigate risks associated with currency fluctuations and potential geopolitical tensions/Western sanctions

·         Economic Stability and Risk Management: Gold is considered a haven asset that maintains its intrinsic value during economic crises and market volatility. EM central banks, facing various economic challenges and uncertainties, see gold as a way to protect their reserves, and local currency and ensure economic stability

·         Inflation Hedge: Many EM like Turkey or even India, have experienced high inflation rates. Gold is traditionally seen as a hedge against inflation, as it tends to retain its value better than fiat currencies during periods of rising prices

·         Geopolitical Considerations: In a global environment marked by geopolitical uncertainties and trade tensions, EM central banks are increasing their gold holdings to safeguard against international sanctions or financial isolation. Gold is a universally accepted asset that can provide financial security in uncertain times and regarded as a haven asset along with USD/US bonds in times of geopolitical tensions

·         Low Interest Rates: The global environment of low interest rates has made non-yielding assets like gold more attractive. With limited returns on other safe investments, central banks find gold a more appealing option for maintaining the value of their reserves; Gold has appreciated almost 25% on average since 2005

·         Long-term Store of Value: Gold has historically been a reliable store of value over the long term. EM central banks are buying gold to ensure that a portion of their reserves retains its value over time, independent of the performance of other assets or currencies

·         Strategic Asset Allocation: Central banks continuously reassess their asset allocation strategies. With increasing economic and financial sophistication, EM central banks are recognizing the strategic importance of holding gold as part of a balanced and resilient portfolio. India’s RBI is now actively supporting GOLD ETF and sovereign gold bonds and thus to back up these paper assets, RBI has to also ensure adequate Gold reserve 

In Q1CY24, Turkey was the biggest buyer, followed by China, India, Kazakhstan, and Singapore, while sold by Uzbekistan, Thailand, Jordan, and Germany.

In 2023, China was the biggest buyer of Gold, followed by Poland, Singapore, Libya, and the Czech Republic, while sold by Kazakhstan, Uzbekistan, Cambodia, Bolivia, and Equator to fight economic crisis and lack of creditors.

But if we consider data from around 2001 to 2023, China remains the biggest buyer of Gold around 106T, followed by Russia, Philippines, Venezuela, and the US, while Gold was sold by Switzerland, the U.K., Uruguay, Brazil, and Austria.

Conclusions:

Looking ahead, apart from EM Central Bank buying & selling, Gold may be influenced by the Fed’s policy action and also the trajectory of Russia-Ukraine, the Gaza war, and other geopolitical tensions. The Fed may start the long-awaited rate cut cycle from Dec’24 and may almost confirm the same by Sep’24.  But if Trump is elected as the next President of the US after the Nov’24 election, then we may see reduced tension on the Russia and Israel front, but higher geopolitical/nuke rhetorics against North Korea, and even Iran along with some real action against ISIS in Iraq, Syria etc. Historically, US Democrats are more war-savvy than Republicans.

Thus under President Trump or any other Republicans, we may see less war-savvy US narratives and more trade war tantrums against China and even Germany/EU. In that scenario, Gold may be subdued amid lower concerns of real geopolitical tensions and various economic sanctions. Also under Trump, there may be a higher emphasis on tax cuts and lower stress on ‘reckless’ deficit spending, which may be also negative for Gold.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500 and Gold

Whatever may be the narrative, technically Dow Future (39400) has to sustain over 39500 for any further rally to 39800/40200-40350*/40500 and may further rally to 40600-40700/41000 and even 42000-42700 in the coming days; otherwise, sustaining below 39450-39400 may again fall to 39200/39000-38900/38600 and further fall to 38400/38200-38100/37900* and 37600/37400 in the coming days.

Similarly, NQ-100 Future (20250) has to sustain over 20500 for a further rally to 20700-21050 in the coming days; otherwise, sustaining below 20450/2035020300/20250 may again fall to 20000/19850-19750/19650* and 19450/19100-18800/18500 and 18400/18100-18000/17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5560), now has to sustain over 5650 for any further rally in the coming days; otherwise, sustaining below 5625/5600-5575/5550 may again fall to 5500/5450-6375/5350 and 5250/5200-5175/5100 and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2340) has to sustain over 2375-2385 for a further rally to 2395/2400 and further to 2410/2425-2435/2455* and 2475-2500; otherwise sustaining below 2370/2360-2345/2320, may further fall to 2290/2275 and may further fall to 2245/2230-2220/2180 and 2155/2115-2085/2045 in the coming days.