Gold prices retreated during the month of February, but at the same time, central banks have been purchasing record amounts of gold as they wrestle with tightening monetary policy amid stubborn global inflation.
One of the catalysts pushing gold prices higher earlier in the year was the re-opening of China. After dealing with a resurgence in COVID-19 cases and other challenges to its economy, China has been purchasing gold just before February.
“Strong buying from China’s ‘official sector’ (possibly any combination of the People’s Bank of China, central bank-related entities or state banks) peaked in late January — just before the Lunar New Year — and has not resumed, but there is no indication of selling,” noted Sprott market strategist Paul Wong in a blog post. “Some profit-taking was observed from Shanghai trading desks but paled in size compared to demand from the official sector. We may see buying from other central banks, but that data will not be available for a few months.”
As mentioned, central banks have been buying gold in record amounts. The blog mentioned that central banks purchased 417 tons in the fourth quarter of 2022, while data for the third quarter was revised higher to 445 tons from 399 tons — in the blog, Wong mentioned that the average quarterly purchase since 2013 was 128 tons, so 2022’s Q3 and Q4 figures were over three times that average.
The blog also noted that the primary reasons for central bank buying was the “need to diversify reserves due to sanctions risk, the poor performance of sovereign bonds in the face of high inflation, a desire for outside money and the de-dollarization process.” Furthermore, gold in and of itself provides an ideal inflation hedge, particularly in times like now where the Fed acknowledges that inflation could stick around for some time.
“Gold helps to diversify portfolios and reduce exposure to currency and market risks,” the blog added further. “Gold is also a symbol of monetary stability, value and credibility to the public and other central banks. Holding gold as a reserve remains a widely accepted practice among central banks worldwide.”
2 Options for Gold Exposure
Investors looking to add gold exposure to their portfolios have options besides buying physical gold directly. One option is the Sprott Physical Gold Trust (PHYS), which is a fund that provides an enhanced physical bullion structure, offering the ease of purchase and sale that comes with being traded on an exchange.
Investors looking for gold exposure with an environmental, social, and governance (ESG) component can consider the Sprott ESG Gold ETF (SESG). The fund directly sources from select gold producers that Sprott believe are leaders when it comes to ESG mining and sustainability.
SESG also adds a backdoor play on gold prices, investing in ancillary services (i.e. mining) that support the gold market as opposed to the actual precious metal itself. In addition, the inclusion of an ESG filter gives conscious investors an opportunity to allocate capital to gold miners exhibiting ESG-friendly operations.
For more news, information, and analysis, visit the Gold/Silver/Critical Minerals Channel.