Central banks continue to buy gold in August, why is the gold price falling?

Also in August, central banks added gold to their reserves. Central banks in particular, which also bought gold earlier this year, were among the buyers in August. In total, the central banks added 77 tonnes to their reserves, while almost no gold was sold. Which central banks bought gold and why did the Gold price While central banks bought precious metals?

Increase in reserves

According to an article by Krishan Gopaul Central banks added 77 tonnes of gold to their reserves, bringing the total amount of gold bought by central banks over the past three months to 219 tonnes. This means that central banks bought more precious metal in these months than in the previous months.

In the months of April and May, gold was even sold on a net basis. This happened mainly because the Turkish central bank had to sell gold. The country is plagued by very high inflation. Consumers turned to gold to protect their purchasing power, forcing the central bank to sell gold in order to contain the trade deficit. In Turkey, the month-on-month inflation rate in September was 4,75 percent. Most central banks are aiming for an annual inflation rate of 2 percent.

China's central bank was the largest buyer of gold. 29 tonnes were added, bringing the total amount of gold China has bought since November last year to 217 tonnes. Poland added 18 tonnes to its gold reserves in August. The central bank in the Eastern European country set a target of adding 100 tonnes of the precious metal this year. From January to August, the central bank bought 88 tonnes of gold. This brings Poland's total gold reserves to 314 tonnes.

In addition, Turkey added gold again to bring reserves up after the April and May sell-offs. Russia was also forced to sell gold this year to cover the budget deficit. The Russian central bank has returned gold reserves to their previous level, after also buying a small amount of gold in August. There are now 2,333 tonnes of gold stored in the vault of the Russian central bank, the same amount as in January.

Why is the price of gold falling?

In March, the gold price shot up sharply, when several banks got into trouble. High inflation and geopolitical uncertainty also pushed up prices. In the past month, however, the gold price has fallen, while the demand for gold from central banks is still very high. That seems contradictory, but there are factors that explain the decline in the price of gold.

An important cause is the high interest rates. Interest rates have risen sharply over the past year and a half, in response to high inflation. The European Central Bank (ECB) recently raised the policy rate to 4.50 percent, while in the summer of 2022 the interest rate was still at 0 percent time. The FED, the U.S. central bank, had already started raising interest rates earlier. There, the interest rate is now between 5.25 and 5.5 percent. The high interest rates make gold relatively less attractive, as no interest is paid on gold. The exchange rate of the dollar has also risen sharply last year. The strong dollar is depressing the demand for gold from traders with a different currency.

Nevertheless, the outlook for gold is still strong, even if there is a short-term decline in the price. In wrote a previous article We already know that a tightening of monetary policy by the Federal Reserve usually has a positive effect on precious metals. In the run-up to an interest rate hike or balance sheet reduction, the precious metal appears to perform much worse than the stock market, but once the interest rate hike has taken place, the precious metal appears to perform better again. So it is not surprising that the price of gold is now falling slightly. It is therefore important to see what interest rates will do in the coming months.

Interest prospect

Economists expect that high interest rates will remain for a few more months, but that central banks will cut interest rates next year. Although it was initially thought that interest rates will be cut around May 2024, the market expects that to happen only after June 2024, it wrote Financieele Dagblad. Inflation in the United States has been falling for some time. In September, core inflation was 3.9 percent. In the previous month, this was still 4.3 percent. In the Eurozone, inflation was 4.3 percent, compared to 5.2 percent in August. However, inflation is still too high, which is why central banks will hold off on cutting interest rates for a while.

Although in the Netherlands the official inflation rate in September was according to Statistics Netherlands (CBS) 0.2 percent, several economists calculated relatively higher inflation rates. This is how Rabobank came up with 8.8 percent inflation. The cause lies in the different calculation methods, as we explained earlier on Holland Gold. With the role of energy contracts changing, inflation in 2022 was likely to be overdone. But due to the new method, the figure in 2023 will be too low. It is therefore wise to also look at the alternative inflation figures of Rabobank or Han de Jong, which therefore result in higher figures.

As inflation rates in America and the Eurozone appear to be falling, it is quite possible that central banks are nearing the end of interest rate hikes. But as long as inflation is still above 2 percent and the negative effects of high interest rates do not seem to be too bad, an interest rate cut does not seem to be in the offing yet. It therefore remains to be seen how inflation will develop further. But the outlook for precious metals remains good, even if gold prices are falling in the short term.

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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here  to subscribe.