An article by: Riccardo Fallico

In early March 2024, the media began to focus again on the price of gold, which after registering a record high of $2078.4 per ounce in late December 2023, showed a sharp rise for several days and remained consistently above $2100 per ounce after March 6. At the time of writing, the all-time high was reached on March 20, with the spot price briefly hitting $2211 per ounce and then ended the day at $2170 per ounce. As for gold futures prices, the Comex platform recorded a high: $2225.3 per ounce for contracts expiring in April 2024. Many market operators expect the price of gold to rise further, exceed and remain permanently above $2200 per ounce in the near future: according to the scenario proposed by JP Morgan American Bank, the gold price could even reach $2300 per ounce by the third quarter of 2025.

The U.S. Federal Reserve dictates its rules on everything, including gold prices

A new surge in gold prices at the end of the first quarter of 2024 was triggered by statements by US Federal Reserve President Jerome Powell, who on March 6, during his speech to the US Congress, stated how the US central bank “is in no hurry to lower interest rates until the policymakers are convinced they have won the battle against inflation.” A further impetus came after the Federal Open Market Committee meeting of the Fed on March 20, and while the benchmark interest rate was left unchanged to continue to bring inflation back within 2%, Powell himself confirmed that the Fed is projecting three possible interest rate cuts for 2024, although the timing of these cuts has not yet been determined.

Indeed, inflationary pressures are one of the main factors that have influenced and are influencing the dynamics of the gold price, which, with the exception of a decline between 2012 and 2016, has continued to rise steadily since 2000. Despite this, its present value, adjusted for the value of the dollar from inflation, remains about 3% below the 2012 price. In its gold outlook for 2024, the World Gold Council (WGC) has developed three possible scenarios for the gold market trend, and all three are related to the future economic situation in the USA. Two of the three scenarios involve further increases in the price of the most precious metal, the smaller in the case of a so-called “soft landing” of the US economy, the larger in the opposite case of a “hard landing,” falling into recession, and the onset of an economic and financial crisis.

It is important to emphasize that investments in gold are not made by private operators who, on the contrary, have short positions at the moment, but by the world’s central banks themselves.

Central banks have been increasing their gold purchases for 13 years now

Analyzing WGC data, we can see how many central banks have started to re-enter the gold market since 2011 to replenish their gold reserves. Over the past three years, global central banks have purchased 2568 tons of gold, of which 2118 tons fall between 2022 and 2023 alone. Among the countries that purchased the largest volumes in 2023 are China with 225 tons, Poland with 130 tons, Singapore with 76 tons, Libya with 30 tons, and Czechia with 19 tons. In 2022, Turkey added 145 tons to its reserves, China added 62 tons, Egypt added 45 tons, Qatar added 35 tons, and Uzbekistan added 34 tons. At the end of 2023, again according to the WGC, the countries with the largest gold reserves were the USA with 8133 tons, Germany with 3352 tons, Italy with 2451 tons, France with 2436 tons, Russia with 2332 tons, and China with 2235 tons.

Between 2000 and 2023, with the exception of France and Germany, which sold 558 and 116 tons of gold respectively, the majority of central banks of the most economically developed countries left their gold reserves virtually unchanged. However, among the developing countries, the central banks of China and Russia are very active. China’s reserves increased by 1840 tons, from 395 tons in 2000 to 2235 tons in 2023. The Russian central bank added 1948 tons over the same period, increasing its reserves from 384 tons in 2000 to 2332 tons by the end of 2023. It should be noted that these data refer only to direct purchases, and there is no information on gold purchases by central banks through agents and/or intermediaries. Given the sensitivity and importance of gold to each country’s national security, no one knows the true size of each country’s gold reserves. According to research presented in 2019 by analyst Jan Nieuwenhuijs, the US Treasury Department lied about the audits of its gold reserves, and to date, the exact amount of gold in US vaults cannot be confirmed. In February 2023, Jan Nieuwenhuijs again calculated that the Chinese central bank had actually accumulated reserves in the amount of 4309 tons of gold, which is much higher than claimed.

Predictions speak about 2024, in which the world’s central banks will continue to build up their gold reserves. A survey of the world’s central banks, conducted by the WGC in 2023, has revealed some very interesting results: 70% of respondents, a 10% increase from the same survey in 2022, believed global gold reserves would increase over the next 12 months. Over the next five years, central banks, faced with rising gold reserves, expect the decline of dollar-denominated national reserves, which together will not exceed 50% of the total volume. This constant appetite for gold will be fueled primarily by emerging economies, more eager to mitigate the economic, financial, and geopolitical risks stemming from the outsized influence of the US currency. In the Global Sovereign Asset Management Study 2023, a survey conducted by the American investment company Invesco among 57 central banks and 85 sovereign wealth funds, showed 80% of respondents saying that geopolitical tensions will have the biggest risk over the next decade, in addition to continued inflationary pressures, and central banks will remain busy increasing their gold reserves.

Gold as a tool to curb inflation

The renewed interest of central banks in gold stems from its function as an economic instrument capable of “balancing” high inflation, and primarily inflation caused or exported by the dollar as the world’s trading currency. Historically, each expansionary monetary cycle in the United States has resulted in an increase in the price of gold, given the subsequent devaluation of the US currency in global financial markets. Current gold price movements are dictated by increasingly persistent rumors about future interest rate cuts starting in mid-2024. Many analysts believe that the Fed will be forced to cut interest rates on the dollar and then return to a policy of quantitative easing. The injection of large new volumes of cheap money into the market will be necessary to ease the health problems of the US banking market and the risks associated with its economy, which is expected to be in recession since 2023.

The accumulation of new gold reserves is also linked to the growth of geopolitical risks at the global level. Since the 2000s, when the USA started to apply more aggressive sanctions policies, many countries began to view gold as a tool to evade the effects of sanctions applied especially by more economically developed countries. Among the countries that did this first were China and Russia, which in the process of expanding their gold reserves were simultaneously selling their dollar assets, primarily US Treasuries. Between 2006 and 2020, the Russian central bank added 1911 tons of gold to its reserves, with a peak of 274 tons reached in 2018. During the same period, Russia sold most of its US Treasuries, reducing its portfolio from $96 billion to $15 billion in 2018. China, however, is still busy selling its US Treasuries: according to official statistics, as of November 2023, China held “only” 782 billion US Treasuries, about half of its dollar-denominated bond portfolio, which in 2011-2013 reached 1.3 trillion dollars. In 2023 alone, China sold US government bonds worth $97.5 billion.

Gold is also needed to fight possible sanctions

Since the start of the Russian special operation in Ukraine, gold has become an even more important tool that central banks deem necessary to circumvent sanctions, given that it is by nature a very liquid asset. The USA, the European Union, Great Britain, and other economically developed countries not only froze all Russian assets and investments on their territories, but also, using the trading power of their currencies, tried to block all trade transactions denominated in those same currencies. This political retaliation has seriously undermined the confidence of foreign investors in the legal and economic system of these same countries, which has demonstrated that no foreign transaction or investment on their territory is safe.

It should be noted that gold does not carry political risk only if the bank has direct access to its reserves. Not all countries have the physical structures necessary to manage and control their reserves. The USA, Great Britain, and France are the three main countries that manage the world’s gold reserves on behalf of other countries. Germany, the second largest reserve country in the world, has direct access to only half of its gold, while the other half is stored in the US and the UK. Starting as early as mid-2023, the repatriation of gold reserves has become a consolidated process; however, the current sanctions regime can be a major obstacle, as evidenced by the example of Venezuela, which in June 2023 lost its case in a final appeal against the UK government over the repatriation of $1.95 billion of gold reserves.


Riccardo Fallico