Ingots of 99.99 percent pure gold are placed in a workroom at Krastsvetmet precious metals plant in the Siberian city of Krasnoyarsk, Russia, January 31, 2023.
Alexander Manzyuk | Reuters
Gold demand soared to an 11-year high in 2022 on the back of “colossal central bank purchases, aided by vigorous retail investor buying,” according to the World Gold Council.
Annual gold demand jumped 18% to 4,741 tons (excluding over-the-counter or OTC trading) across the year, the largest annual figure since 2011, fueled by record fourth-quarter demand of 1,337 tons.
Key to the surge was a 55-year high of 1,136 tons bought by central banks across the year, the industry-backed group revealed, noting that the majority of these purchases were “unreported.”
This marked a 152% increase from 2021, when central banks bought just 450 tons of gold, and the World Gold Council attributed the spike to geopolitical uncertainty and high inflation.
“Central bank net purchases in Q4 totalled 417t, lifting H2 total buying to 862t. Echoing Q3, data for the final quarter of the year was again a combination of reported purchases and a substantial estimate for unreported buying,” the WGC said.
“Should more information about this unreported activity become available, these estimates may be revised.”
Investment demand for gold increased by 10% to 1,107 tons, while holdings of gold ETFs (exchange-traded funds) saw smaller outflows in 2022 than in the previous year.
Jewelry consumption dropped 3% in 2022 to 2,086 tons, with much of the weakness concentrated in the fourth quarter as gold prices rallied.
Total annual gold supply inched 2% higher in 2022 to 4,755 tons, with mine production notching a four-year high of 3,612 tons.
Central bank bulk buying
“This marked a banner year for central bank buying: 2022 was not only the thirteenth consecutive year of net purchases, but also the second highest level of annual demand on record back to 1950, boosted by +400t demand in both Q3 and Q4,” the WGC said.
The group’s annual survey of policymakers revealed that the key drivers behind holding gold were its “performance during times of crisis” and its “role as a long-term source of value.”
“It’s hardly surprising then that in a year scarred by geopolitical uncertainty and rampant inflation, central banks opted to continue adding gold to their coffers and at an accelerated pace.”
The majority of the central bank buying in 2022 came from emerging markets, with the Central Bank of Turkey the largest buyer at a record 542 tons. China, India, Egypt, Qatar, Iraq, the UAE and Oman all significantly boosted their gold reserves over the year.
‘It may be different this time’
Despite a difficult backdrop of rapid hikes to interest rates and a strong U.S. dollar for much of the year, the fourth-quarter resurgence was enough to see gold prices eke out a slight gain for 2022, with a 3% quarterly gain taking the precious metal to a 0.4% annual increase.
Gold typically weakens in times of rising interest rates and a strong dollar, partly because it is priced in U.S. dollars despite most demand originating from outside the U.S., Wells Fargo highlighted in a note last week. This means that the purchasing power of non-U.S. buyers is reduced and harms global gold demand.
Wells Fargo Head of Real Asset Strategy John LaForge also noted that since gold is a non-interest-bearing asset, it becomes less attractive to institutional investors who can buy Treasurys and other interest-bearing assets when rates rise.
Gold started 2022 well, up 12% through March, but dropped off once the U.S. Federal Reserve began aggressively hiking interest rates to rein in inflation, leading to a stronger dollar and forming significant headwinds for the precious metal.
The spot gold price is also up more than 5% so far in 2023, trading at around $1,926 per troy ounce as of Wednesday morning. LaForge said that while Wells Fargo currently holds a neutral view on precious metals versus other commodities, the U.S. banking giant does not necessarily expect poor performance.
Wells Fargo’s year-end target range remains $1,900 – $2,000, but LaForge said “it may be different this time.”
“We may even need to increase our year-end 2023 target range should the U.S. dollar remain range bound and we gain confidence that rate hikes are near their end,” he added.
Gold becoming ‘very expensive’ for consumers
James Steel, chief precious metals analyst at HSBC, said rising prices could eventually begin to compress demand in 2023 as gold gets “very expensive for consumers,” especially since around 70% of buying is concentrated in emerging markets.
“On the ground buying — coins, bars, jewelry — is going to get increasingly expensive and this may very well at least curb the rally, so I would certainly be cautious, and HSBC’s camp is that the Fed will maintain rates and not cut them in the second half of the year,” he said.
“If that is realized as 2023 unfolds then that could take some of the oxygen away from the gold market as well.”