Proving that there was almost nowhere to hide in the first half of 2022, gold joined stocks and bonds to the downside in the first six months of the year.
Using the SPDR Gold Shares (NYSEARCA:GLD) – the world’s largest gold-backed exchange traded fund – as the bogey, gold did in fact perform noticeably less poorly than equities and bonds in the January through June period. However, gold is still in the red this year, though in modest fashion, but GLD is almost 13% removed from its March high.
All that said, the fact remains that bullion is outperforming the traditional asset classes while proving remarkably sturdy in the face of soaring bond yields and a strong U.S. dollar.
There are four factors that primarily determine gold’s price action -- jewelry, investment, technology and central bank net purchases. Jewelry accounts for about half of gold demand and it was, not surprisingly, punished in 2020 due to the onset of the coronavirus pandemic. However, it’s rebounding and that’s good news. More good news: Central banks remain devoted buyers of the yellow metal.
Central Bank Ballast for Bullion
Data from the World Gold Council (WGC) indicate global central bank reserves of gold are expected to increase to 25% from 21% -- significant on a number of levels, not the least of which is the point that the WGC polled central bankers to come up with that forecast.
In particular, emerging markets central banks are loyal buyers of bullion. That makes sense as they look to diversify away from dollar-denominated assets and, in the case of Russia, efforts to avoid economic sanctions. Russia’s central bank has been one of the most devoted in the world when it comes to buying gold to bolster reserves and that’s been the case for a decade. However, there’s much more to emerging markets central banks’ affinity for gold.
“Buying quickly gathered momentum, and net purchases have been significant for the past 12 years,” notes State Street Chief Gold Strategist George Milling-Stanley. “Initially, the largest buyers were China and Russia, soon joined by Turkey, followed by a wide array of countries almost exclusively in emerging markets. Other buyers included Thailand, South Korea, Brazil, Mexico, India, and Kazakhstan, joined later by Uzbekistan and Egypt.”
From a long-term perspective – usually the appropriate way for investors to view gold – there’s ample room for emerging markets central banks to add gold reserves because they’re current holdings of the yellow metal are relatively low.
“The economically weaker emerging market (EM) countries had no option but to use these powerful currencies to settle international trades, and they therefore had no need to purchase gold to back their own currencies, even if they had had the funds to do so,” adds Milling-Stanley. “Consequently, the average allocation to gold in EM official reserves is less than 5% today, with a much greater proportion in US dollar instruments, on average greater that two-thirds.”
Credible Catalyst for Gold
With inflationary tailwinds showing no imminent signs of easing and traditional assets coming off their worst first half showings in decades, those factors can act as propellants for gold.
Add to that, central banks -- emerging markets and otherwise – could be pivotal backstops for gold prices for the remainder of 2022 an beyond.
“While many of the large, developed-market countries still possess huge legacy gold holdings from the days of the gold standard, EM countries have a significant amount of room to increase their gold reserves. Many emerging market countries believe they are still dangerously over-exposed to the US dollar — even after 12 years of substantial gold buying — and plan to continue to add to their reserves to hedge that exposure,” concludes Milling-Stanley.