The price of gold has soared to the point where a single ounce hit a record of more than US$2,500 on some days in recent weeks while the cost of a 400 ounce gold bar reached $1 million for the first time ever.
One significant development in the yellow metal’s “blistering rally” has been the breakdown of its relationship with assets such as the US dollar and with US interest rates, according to JP Morgan & Chase.
The price rise has been driven by economic and geopolitical uncertainty of the past few years, online trading platform Best Brokers says an August 28 report chronicling factors behind the increase.
Expectations that the US Federal Reserve will begin trimming interest rates this month have also helped launch gold on its sharp and sustained upward trajectory.
Central banks in particular were intensive gold buyers as they increased their reserves of the highly liquid commodity, according to Best Brokers. Central banks purchased more than 1,000 tonnes of gold in each of the last two years, more than double the annual volume in the previous ten years. Purchases have been spearheaded by the central banks of China and Russia, followed by those in emerging markets such as Turkey, India, Kazakhstan, Uzbekistan and Thailand.
As the global economy becomes ever more fragmented into rival economic and ideological blocs, the dollar-based monetary system is coming under increasing stress and gold is reassuming its role as a safe haven asset.
The move by the US and several other nations to freeze foreign currency assets of Russia and others has been termed by some, including Harvard scholar Paul Sheard, as increasing “weaponisation” of the dollar.
The China factor
The Best Brokers report highlights a surge of Chinese interest in bullion over the past year and a half. The People’s Bank of China has raised the share of gold in its official reserves from 1.8% in 2015 to a record 4.9% at present, while cutting its holding of US Treasuries from $1.3 trillion in the early 2010s to $780 billion.
Using data compiled by the World Gold Council and the IMF, Best Brokers found that after China ended its 18-month gold-buying spree in May, Turkey emerged as the biggest buyer with purchases exceeding 44.74 tonnes in the first six months of this year.
The second highest demand was from India with 37.18 tonnes of purchases, followed by China, which has added 28.93 tonnes to its massive gold reserves of 2,264.32 tonnes.
Despite its recent gold rush, China is still only the world’s sixth largest gold holder behind the US, Germany, Italy, France and Russia, with Switzerland, Japan, India and the Netherlands making up the rest of the top ten global holders.
The US has 8,133 tonnes of gold in its reserves, Germany holds 3,351 tonnes, while Italy, France, Russia each have more than 2,000 tonnes.
Meanwhile, the central bank of the Philippines sold the most gold this year, roughly 24.95 tonnes or 15.7% of its total gold holdings. The Philippines is one of the world’s biggest gold producers and its central bank is obliged to buy most locally mined output, often to sell it on.
But the Philippine central bank is an exception among its counterparts who are snapping up the yellow metal, and it appears that the price of gold has little place to go but further up while so many uncertainties persist.
