Demand for the shining yellow metal surged to its highest level in more than a decade in 2022, spurred by “colossal” central bank purchases that highlighted the asset’s appeal as a safe haven. Demands from retail investors have also helped to rally prices.
According to the World Gold Council, global central bank purchases reached a 55-year high last year, driving a rise in annual gold demand of 18% to 4,741 tons, the highest level since 2011.
In the second half of the year, central banks bought gold at a historically high rate. Many observers relate this trend to a desire to diversify reserves away from the dollar after the US froze Russia’s dollar-denominated holdings as part of its sanctions against Moscow.
Retail investors’ gold demand: Additionally, retail investors poured money into the yellow metal to hedge against excessive inflation.
As the Federal Reserve’s decision to keep raising interest rates hurt the value of the dollar and fueled concerns about a likely economic downturn this year, gold prices surged to a nine-month high on Thursday.
Gold performance this week: This week, gold did significantly better than its counterparts, with the Fed meeting adding to the precious metal’s appeal as a shelter. After the Fed raised interest rates by a relatively modest 25 basis points (bps) and acknowledged its progress against inflation, gold prices increased by more than 1%. However, the central bank acknowledged that it is unclear when interest rates will reach their high.
- This raised anticipations that the Fed would stop raising interest rates by the middle of 2023 and maybe lower them by the end of the year as U.S. economic growth slowed. A situation like this is probably advantageous for gold.
- Gold futures surged to $1,969 per ounce in the early hours of Thursday, while spot gold increased 0.2% to $1,954 per ounce.
- The dollar’s rapid decline to a level not seen in over nine months relative to a basket of currencies corresponded with gold’s climb.
Impact of ECB’s policy move: The expectation of interest rate increases by the European Central Bank and the Bank of England, which supported the euro and the pound, put more pressure on the dollar. Rate increases of 50 basis points are anticipated from both banks as they work to rein in excessive inflation.
However, increasing interest rates are also projected to put further pressure on global economic growth, which boosts gold’s image as a safe haven when combined with perceptions of a weaker dollar.
What you should know: Due to $3 billion in annual withdrawals from exchange-traded funds that are backed by gold, rising interest rates caused gold to decline from a record high above $2,000 per troy ounce in March of last year to just around $1,600 per troy ounce in November.
- Gold investment demand climbed by 10% to 1,107 tons last year although gold ETF (exchange-traded fund) holdings experienced less outflow in 2022 than in 2021.
- 2022 saw a 3% decline in jewellery consumption to 2,086 tons, with the majority of the deterioration occurring in the fourth quarter as gold prices increased.
- In 2022, the total annual supply of gold increased by 2% to 4,755 tons, with mine production reaching a four-year high of 3,612 tons.
- being said, it’s imperative to be aware that the precious metal normally declines when interest rates are increasing and the dollar is strong, in part because gold is priced in U.S. dollars even though the majority of the demand comes from outside the U.S. This lowers the purchasing power of non-American buyers and hurts the demand for gold around the world.