Currency weakness, macroeconomic uncertainty driving Asian demand for gold
Central bank, consumer demand push prices to record quarterly average of US$2,070 per ounce but rate of purchase seen continuing
GOLD prices have hit new highs in recent months, but several countries are still on a gold-buying spree as demand for the precious yellow metal has soared despite higher prices.
The unprecedented rate of purchases by central banks, both regionally and globally, is set to continue amid macroeconomic uncertainty, market watchers said.
But with the additional burden of currency weakness plaguing countries in South-east Asia, the region could top the charts in terms of central bank purchases and consumer demand.
The World Gold Council’s (WGC) Gold Demand Trends report for the first quarter this year said total global gold demand – including over-the-counter (OTC) purchases – rose 3 per cent year on year to 1,238 tonnes, marking the strongest first quarter since 2016.
Demand excluding OTC purchases, however, was down 5 per cent to 1,102 tonnes in Q1 due to continued exchange-traded fund outflows.
WGC noted that a cocktail of factors has propelled gold prices to a record quarterly average of US$2,070 per ounce. These include healthy investment from the OTC market, persistent central bank buying, as well as higher demand from buyers in Asia.
Net central bank demand totalled 290 tonnes in Q1 based on official holdings, which WGC described as “the strongest start to any year on the record”.
A majority of net purchases in the first quarter was made by central banks in East and Central Asia.
In Singapore, the Monetary Authority of Singapore (MAS) grew its gold reserves by two tonnes in Q1. The city-state’s central bank was the only bank from a developed market to add to its gold reserves.
Other noteworthy buyers in Asia for the quarter included the Reserve Bank of India that added 19 tonnes to its reserves, the National Bank of Kazakhstan with 16 tonnes and the Central Bank of Oman with four tonnes. The People’s Bank of China also added 27 tonnes to its gold reserves.
According to data from WGC, Singapore had 236.6 tonnes of gold, or US$16.8 billion worth, in its reserves as at Q1. Gold also constituted 4.5 per cent of the state’s total reserves.
WGC’S global head of central banks Fan Shaokai said MAS possesses “very robust foreign exchange reserves overall”.
“Macroeconomic and geopolitical concerns are still very much present, so the MAS’ continued gold buying may stem from a desire to achieve greater resilience in its portfolio,” he said, adding that he expects central banks in general to continue adding to gold holdings this year amid ongoing concerns.
Analysts from Bank of America noted that investor concerns over the durability of US dollar dominance have been sustained amid growing geopolitical tensions, as well as inflation and debt levels.
The analysts added that central banks may be adding to their reserve gold allocations to reduce exposure to the US dollar, among other reasons.
Outside of central bank purchases, consumer demand in Singapore also spiked in Q1 – growing 20 per cent despite record gold prices. Bar and coin demand rose 29 per cent, while jewellery consumption was up 14 per cent.
Fan noted that one theme in some South-east Asia markets was a desire to offset potential currency weakness.
Countries such as Vietnam, Thailand and Indonesia booked year-on-year upticks in consumer bar and coin demand in Q1. The currencies of these countries have weakened considerably against the US dollar in recent months, with the respective central banks intervening to rescue their slipping currencies.
“Singapore has higher purchasing power and the relative strength of the Singapore dollar partially offset the rise in gold prices compared to its neighbours,” said Fan.
“Singapore also has a larger population of high-net-worth individuals who can continue to buy despite rising prices. These factors may have contributed to the robustness of consumer demand in Singapore,” he added.
Looking ahead, gold prices are set to remain elevated as global investors and central banks debate the extent of macroeconomic troubles such as ongoing Middle East tensions.
A recent report from BMI said the Middle East has entered a “higher plane of geopolitical risk”, which
has in turn placed a “firm floor under gold prices”. BMI believes this floor, as things stand, is around the US$2,250 per ounce mark.
“Gold’s safe haven characteristic allows it to thrive from geopolitical uncertainty, especially as a Rafah invasion by Israel looms,” the analysts said.
Bank of Singapore’s commodity strategist Sim Moh Siong said that while gold prices are at historical highs in nominal terms, real gold prices are still 10 to 15 per cent below the inflation-adjusted peak seen in January 1980.
“Gold’s valuation is high but not extreme,” Sim said, adding that nominal gold prices still have room to climb to US$2,600 per ounce to match the inflation-adjusted levels that were seen back in 1980.
However, Sim noted that gold’s allure could dim. The likes of a peaceful resolution to ongoing Middle East tensions, easing of China’s growth concerns, as well as a re-acceleration of the US economy and a shift of the US Federal Reserve to a more hawkish stance could result in a weaker outlook for the metal, he said.