Gold prices have surged to record highs above $2,400 per troy ounce, marking a 33% increase since late 2022. This rise defies traditional economic trends, such as higher real interest rates, which usually diminish gold’s appeal. Retail investment demand has not significantly contributed to this rally. Instead, the main drivers are global central banks, especially in emerging markets. Since late 2022, central banks have added around 2,200 tons of gold, making up more than a fifth of global gold demand. This shift is partly due to gold’s immunity to sanctions, a critical factor after Western sanctions on Russia in 2022. Central banks in China, India, and Turkey are notable buyers, with China alone increasing its gold reserves by 16%. Geopolitical tensions and the desire to diversify away from dollar-based assets are expected to sustain the demand for gold, potentially continuing its price rally.

Defying the Norm: Gold Against Economic Trends

One of the remarkable aspects of this gold rally is its defiance of traditional economic headwinds. In 2024, real interest rates have risen, with yields on 10-year U.S. inflation-protected Treasury securitiesUnited States Treasury securities are debt instruments issued by the United States government to finance its spending. Treasury securities come in a variety of forms, including bil... More increasing by approximately 0.37 percentage points. Usually, higher real rates diminish gold’s appeal, as gold does not generate income. Despite this, gold prices have surged.

Retail investment demand has not significantly contributed to this rally either. For three consecutive years, gold-backed exchange-traded funds have experienced net outflows. Even though trends like Americans purchasing small gold bars at Costco have emerged, they have not substantially impacted overall demand.

Central Banks: The Main Drivers

The primary force behind gold’s meteoric rise is global central banks, particularly those in emerging markets. Since the third quarter of 2022, central banks have collectively added around 2,200 tons of gold, valued at nearly $170 billion at current prices, according to the World Gold Council. These net purchases now constitute more than a fifth of global gold demand, double the proportion seen between 2012 and 2021.

The Role of Central Banks

Central banks are turning to gold for several reasons, chief among them being the metal’s immunity to sanctions. The imposition of Western sanctions on Russia following its invasion of Ukraine in 2022 has led many central banks to diversify away from dollar-based assets. Russia’s approximately $300 billion in international reserves were frozen, and there have been discussions about using the income from these assets to support Ukraine. Consequently, gold has become a crucial component of Russia’s reserves, which has influenced other nations to follow suit.

While much of the central bank gold buying remains unreported, notable purchasers include China, India, and Turkey. These six central banks have accounted for all net purchases since mid-2022, as reported by Goldman Sachs.

China’s Strategic Gold Accumulation

China’s central bank has been particularly active, buying gold for 18 consecutive months since November 2022. This has increased China’s gold reserves by 16%, or 10 million troy ounces. Given China’s substantial economic influence, its gold purchasing strategy could significantly impact the market.

China’s economy is vastly more significant than Russia’s was in 2022, complicating potential sanctions should China invade Taiwan. Although it is unlikely that China would shift all its $3.4 trillion in reserves into bullion, even a modest increase in its gold reserves can move the market. As of April, gold constituted nearly 5% of China’s total reserves, up from around 3% in 2022. If China were to allocate just 1% more of its reserves into gold, it would equate to around 9% of the total global supply last year, based on current prices.

Geopolitical Tensions and Gold’s Future

Ongoing geopolitical tensions and sanctions are expected to continue supporting the demand for gold. The yellow metal’s appeal as a safe-haven asset is particularly pronounced during periods of political instability and economic uncertainty.

Sanctions-Proof Asset

Gold’s unique position as a sanctions-proof asset makes it an attractive option for central banks aiming to shield their reserves from geopolitical risks. The shift towards gold is a strategic move to safeguard national reserves from potential freezes or confiscations that could arise from international conflicts or sanctions.

The Outlook for Gold Prices

As central banks continue to diversify their reserves and geopolitical tensions persist, the upward pressure on gold prices is likely to remain. The increasing demand from central banks, coupled with gold’s status as a safe-haven asset, suggests that the metal’s rally may continue in the foreseeable future.

Insights

1. Gold’s price surge is driven mainly by central bank purchases.
2. Geopolitical tensions and sanctions influence central banks to prefer gold.
3. China’s strategic gold accumulation has significant market implications.

The Essence (80/20)The Origins and Evolution of the 80/20 Principle The Discovery by Vilfredo Pareto In 1897, Italian economist Vilfredo Pareto uncovered a striking pattern in his study of wealth and... More

• Core Topics: Central banks’ gold purchases, geopolitical tensions, and gold’s appeal as a sanctions-proof asset.
• Description: Gold’s price increase is driven by central banks in emerging markets buying large quantities to hedge against geopolitical risks. This trend reflects a strategic move away from dollar-based assets due to sanctions, especially after the 2022 sanctions on Russia. China’s continuous gold buying exemplifies this strategy.

The GuerillaStockTrading Action Plan For Investors

1. Monitor Central Bank Activities: Track gold purchase patterns of major central banks, especially in emerging markets.
2. Analyze Geopolitical Events: Assess how ongoing and potential geopolitical tensions might influence gold demand.
3. Investment Strategy: Consider gold as a strategic investment to hedge against geopolitical risks and currency devaluation.

Blind Spot

While central banks are major buyers, retail investment and industrial demand might play a larger role in the future, potentially altering the market dynamics. This could lead to volatility not fully accounted for by central bank activities alone.

GLD Technical Analysis

Price Trend: The price has shown a significant upward trend from mid-March to early May, reaching a peak around $220. Recently, the price has pulled back slightly to around $215.92, testing the 50-day moving average (blue line) at $214.86. The 200-day moving average (red line) is below the current price, indicating a long-term upward trend and strong support around $192.36.

Volume: The trading volume appears consistent, with occasional spikes that coincide with significant price movements. The latest volume is 4,212,300, suggesting moderate trading activity.

Relative Strength IndexIn the world of technical analysis, the Relative Strength Index (RSI) stands as a cornerstone tool for traders seeking insights into market momentum. Developed by J. Welles Wilder ... More (RSI): The RSI is at 47.90, indicating a neutral position. It is neither in the overbought nor oversold territory, suggesting that the stock is fairly valued at its current level.

On-Balance VolumeThe On Balance Volume indicator (OBV) is a technical analysis tool used to measure the flow of money into and out of a security over a specified period of time. It is a cumulative ... More (OBV): The OBV is trending upwards, indicating that buying volume is higher than selling volume over the analyzed period. This supports the recent bullish trend in price.

Stochastic RSIIn the realm of technical analysis, the Stochastic RSI (StochRSI) emerges as a powerful tool for traders seeking to navigate market dynamics with precision. Developed by Tushar S. ... More: The Stochastic RSI is very low at 0.020, indicating that the stock is oversold. This suggests a potential buying opportunity as the price may be due for a rebound.

Average Directional IndexThe Average Directional Index (ADX) stands as a cornerstone indicator in the toolkit of technical traders, offering insights into the strength of market trends. Developed by Welles... More (ADX): The ADX is at 27.93, which indicates a moderate trend strength. It is above 20, suggesting that the current trend is valid, but not excessively strong.

Chaikin OscillatorNamed after its creator Marc Chaikin, the Chaikin Oscillator stands as a formidable tool in the arsenal of technical analysts. This oscillator is designed to measure the accumulati... More: The Chaikin Oscillator is negative at -3,529,706, indicating that there is some selling pressure. This could be a short-term bearish signal.

Time-frame Signals

• 3-Month Outlook (Short-term): The stock is currently testing its 50-day moving average with an RSI near neutral but with a very low Stochastic RSI indicating oversold conditions. The short-term outlook suggests a potential bounce back. Recommendation: Buy.
• 6-Month Outlook (Mid-term): Given the upward trend in OBV and the moderate strength of the current trend (as indicated by ADX), the mid-term outlook remains cautiously optimistic. Recommendation: Hold.
• 12-Month Outlook (Long-term): The price is well above the 200-day moving average, indicating a strong long-term upward trend. The long-term fundamentals seem robust, making it a favorable long-term investment. Recommendation: Buy.

Looking Ahead

Gold’s current surge is driven primarily by geopolitical hedgingFinancial hedging is a strategy used to reduce or eliminate the risk of financial losses that may arise from unfavorable price movements. More from global central banks, especially in emerging markets. This trend is likely to persist as long as geopolitical uncertainties and economic instabilities continue to influence the global financial landscape. The strategic accumulation of gold by central banks underscores its enduring value and reinforces its status as a vital component of national reserves.

FAQs on Central Banks’ Geopolitical Hedging and Gold

Book Recommendations

1. “The New Case for Gold” by James Rickards
   This book argues for the relevance of gold in the modern financial system. Rickards, an expert in finance and international economics, explains why gold remains a critical asset for individuals and nations, offering insights into its historical importance, current relevance, and future potential as a hedge against economic instability and currency devaluation. “The New Case for Gold” complements the article by arguing for gold’s ongoing relevance and explaining why it remains a critical asset, which aligns with the article’s insights into central banks’ strategic gold accumulation.
2. “Currency Wars: The Making of the Next Global Crisis” by James Rickards
   In this book, Rickards delves into the concept of currency wars, where countries compete to devalue their currencies to gain trade advantages. He discusses the implications of these policies on global economics and highlights the role of gold as a stable asset amidst the chaos of competitive devaluations and financial crises. “Currency Wars” connects to the article by highlighting how economic policies and currency devaluations influence global financial stability, reinforcing the article’s points about geopolitical tensions driving gold demand.
3. “The Gold Standard in Theory and History” edited by Barry Eichengreen and Marc Flandreau
   This compilation provides a comprehensive overview of the gold standard, exploring its theoretical underpinnings and historical implementations. It covers the benefits and drawbacks of the gold standard, offering a nuanced perspective on how it has shaped global financial systems and its potential future role. “The Gold Standard in Theory and History” offers historical context that can help readers understand the foundational principles behind gold’s enduring value, as discussed in the article.