The curious case of official gold demand

The recent publication of the breakdown of gold demand in 2022 by the World Gold Council (WGC) showed massive buying by the official sector, which scooped up 1,136 tonnes last year (150% more than in 2021). Most of these purchases were in the form of unreported purchases (which refer to undeclared purchases, mostly by central banks and sovereign wealth funds). 

In light of their sheer volume, much of the so-called unreported purchases (755 tonnes last year) likely came from central banks. While the Bank of Russia has stopped reporting its gold purchases, most of the increase in unreported purchases likely originated in China, which aims to wean itself off dependency on the US dollar, which currently accounts for a large part of its foreign-exchange reserves. Other countries besides Russia and China may also wish to reduce their dependency to the US dollar in light of the West’s freezing of Russia’s FX reserves. 

Unreported purchases could lead to higher official demand in the next few years. However, we do not see the same strong gold dynamics as in 2009, when all the major sources of demand (jewellery and investment demand as well as official demand) pushed the gold price higher at the same time. That said, a structural increase in official demand would likely make the gold price more resilient to dips in investment flows of the kind seen in 2022.

Overall, we see high geopolitical uncertainties as supporting the gold price due to higher official demand in the years ahead. Since unreported purchases for gold probably reflect a desire by certain countries to diversify their strategic reserves, such demand could remain strong in the years ahead. At the same time, while sovereign wealth funds may have increased their allocations to gold, their general investment goal to create long-term returns for future generations suggests that interest in non-yielding gold may not be that strong (especially since the rise in yields means that bonds are once again being seen as a credible option for capital preservation).

In light of all these considerations, we recently revised higher our projections for the gold price. Our three-month forecast currently stands at USD1,820 per troy ounce (compared to a price of USD1,853 on 13 February), our six-month forecast at USD1,920 and our 12-month forecast at USD1,980.