Central banks have dramatically increased the quantity of gold on their balance sheets because of inflation and global tensions.
John Reade, chief market strategist at the World Gold Council (WGC), said that a long-term continuation of this trend could fundamentally change the market for gold.
Last year, central banks doubled their gold purchases compared to the purchase rate over the last decade.
When asked on Classic Business about the factors driving gold demand, Reade said that “the thing that really stands out is the strength that we see in central bank gold purchases, particularly in the second half of 2022″.
A WGC report said that a high inflation environment and geopolitical uncertainty were key reasons for holding gold. Gold performs well during times of crisis and is a long-term store of value.
“It’s hardly surprising then that in a year scarred by geopolitical uncertainty and rampant inflation, central banks opted to continue adding gold to their coffers and at an accelerated pace,” said the report.
The gold price has soared in recent months, increasing by about 14% from October last year. Gold is currently trading at $1,855 per ounce.
2022 was a good year for gold prices despite strength in the dollar, said Reade.
A strong dollar tends to drive gold prices lower, as gold prices are dollar-denominated. However, gold finished more or less level on the year.
On the supply side, Reade said that gold prospecting yielded very few results last year, and power constraints affected the operation of gold mines.
As such, there is the potential for substantial tailwinds for gold this year.