Gold is finally delivering for investors. Sort of. The SPDR Gold Shares ETF (GLD ), the largest exchange traded fund backed by physical holdings of the yellow metal, is up nearly 2% year-to-date.
That could be the start to something more impressive, particularly with data confirming that inflation remains stubbornly high in the U.S. While the gold/inflation thesis could be challenged by the Federal Reserve raising interest rates more than expected this year — bullion is a rate-sensitive asset — there are other catalysts that could support the yellow metal and the related ETFs.
Notably, global central banks have, in recent years, displayed voracious appetites for gold. That was the case last year.
“The results are in: 2022 saw the highest-ever level of net gold purchases by central banks. According to the World Gold Council’s most recent Gold Demand Trends report, central banks purchased a net of 1,136 metric tons (t) for their official reserves. This makes 2022 the 13th consecutive year of net official sector buying,” noted George Milling-Stanley, chief gold strategist at State Street Global Advisors (SSGA).
Among the largest central bank buyers of the yellow metal last year were central banks in Turkey, China, Egypt, Qatar, and Iraq, among others. Predictably, central banks don’t just wade into the gold market. They buy in bulk, pulling considerable supply off the market, which, over the long term, can work in favor of investors holding physical gold or ETFs such as GLD.
Adding to the potential potency of the gold/central bank investment thesis is that there’s room for growth and the reasons behind this buying binge are easy to understand.
“North American and Western European economies typically hold about two-thirds of their official reserves in gold. In sharp contrast, emerging market (EM) countries tend to hold less than 5% of their official reserves in gold, with the remainder mostly in dollar-denominated assets. Most EM governments regard their reserve holdings as dangerously skewed, with a significant over-exposure to the dollar. It is that perceived imbalance they have been trying to rectify with steady gold purchases since 2010,” added Milling-Stanley.
Another interesting point to consider is that the data highlighting central bank gold buying may be inaccurate to the downside. As SSGA’s Milling-Stanley notes, there are multiple examples over the course of history where central banks bought large amounts of gold in secrecy. Australia, China, and Japan are examples of that.
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