In asset markets, prices often move first. Once they do, experts come up with knowledgeable explanations as to why they moved, though no one saw it coming. This little drama is playing out in bullion markets right now. Global gold prices have suddenly taken wing in the last six months, zooming 30 per cent from $1,820 a troy ounce in early October 2023 to over $2,380 now (April 19). This has prompted a flurry of research reports attributing the rise to geopolitical tensions, Chinese buying and myriad other reasons, while revising gold price targets to $2,700-3,000 by year-end.

Investors would do well to take these targets with a pinch of salt, as the reasons for the recent gold price surge are far from clear. While ‘geopolitical crisis’ is a handy explanation for any move in bullion, geopolitical flare-ups in the last five years did not trigger a similar response from gold. Gold hit a high of over $1,920 a troy ounce in September 2011 during the global commodity ‘super-cycle’. Thereafter, it took nine years and the onset of Covid to take it back to $2,000 levels. From 2018 to 2023, the world saw two waves of Covid, the Russia-Ukraine war and a couple of Israel-Hamas armed conflicts, but bullion prices did not break decisively past $2,000 as they have done now.

This suggests that while the recent Israel-Iran conflict may have added legs to the bullion rally, it may not be the sole reason behind it.

Who’s buying?

For the price of any commodity to skyrocket, demand for it needs to strongly outpace supply. Globally, the demand for gold from the traditional sources has been quite lacklustre and actually lagged supply, since Covid. Data from the World Gold Council (WGC) shows that between (calendar years) 2018 and 2023, global gold demand grew by just 6 tonnes while supply rose by 123 tonnes. In the fourth quarter of 2023, when the gold rally began, global gold demand actually dipped by 12 per cent year-on-year to 1,150 tonnes while supply was flat at 1,221 tonnes.

Historically, jewellery buyers have been the largest consumers of gold, absorbing 40-50 per cent of global supplies. But Covid seems to have taken the sheen off spending on jewellery. Jewellery demand which was at 2,290 tonnes in 2018 slumped to 1,324 tonnes in 2020 as Covid struck and households made a beeline for bank deposits. The post-Covid unlock saw jewellery demand rise to 2,168 tonnes, but it has stayed lower than 2018 levels. China and India, the two largest markets, have seen their jewellery demand shrink 4-6 per cent between 2021 and 2023.

Jewellery demand data for 2024 is not yet available. But jewellery buyers tend to be the most price-sensitive actors in the bullion market. They actively put off purchases when prices are high. Therefore, it is quite unlikely that gold’s surge past lifetime highs is being triggered by returning jewellery buyers.

Outflows from ETFs

The category of buyers most likely to make a rush for gold when crisis strikes, is Exchange Traded Fund (ETF) investors. ETF investors don’t mind high prices as they usually chase returns.

Historically, big upmoves in gold such as the one in 2011 were triggered by ETF buying. But ETF investors are yet to join the current gold price rally, as gold ETFs have faced net outflows for the last ten months. Post-Covid, with bond yields rising and stocks delivering great returns, gold appears to have lost some charm for active investors. ETF demand could pick up if gold prices continue to rise, but only if stock prices or interest rates materially fall. Physical bar and coin buying has not displayed any great traction either. It dipped 3 per cent in 2023 and was down 7 per cent year-on-year in Q4 2023.

If fundamental investors were absent, could speculators be behind the gold rally? Data culled by WGC shows net gold long positions on Comex rising from below 190 tonnes in October 2023 to about 730 tonnes by April 9, 2024. While this could be adding legs to the gold rally, speculative interest in gold is much lower today than it was during Covid (2019-20). Then, Comex gold net longs rose from 850 to 1,200 tonnes.

Central banks step up

Most traditional buyers of gold have been quite lukewarm towards it post-Covid. But one set of actors who have developed a real passion for it are global central banks. In the eight years from 2011 to 2019, central banks added 540 tonnes annually on an average to their gold reserves. After a pause in 2020/21, they have come back with a vengeance, mopping up 1,082 tonnes and 1,037 tonnes in 2022 and 2023, or over 20 per cent of global supplies.

Before 2008, central banks used to alternate between buying and selling from their gold reserves. WGC data shows that between 2002 and 2008, their aggregate gold reserves fell by 4,137 tonnes. But after the global financial crisis and the advent of Quantitative Easing (QE) — shorthand for money printing by developed world central banks — this trend has reversed with central banks making net additions every year. This buying spree has gained strength after Covid. Of the 6,681 tonnes of gold added to central bank coffers between 2009 and 2024 (until February), 1,576 tonnes were added just in the three years post-Covid, when the Western central banks doubled down on QE.

Central banks don’t officially say why they are adding gold — an asset (unlike treasuries) that delivers no cash flows and which Keynes described as a barbarous relic.

But it is interesting that it is not central banks of the US, Germany, Italy or France — the largest holders of gold — which are buying more of it. Instead, it is the central banks of China (309 tonnes), India (182 tonnes), Turkey (154 tonnes), Singapore (105 tonnes), Poland (130 tonnes) and Thailand (90 tonnes) that have added the most gold post-Covid. These are large economies which haven’t gone overboard on QE or zero-rate policies.

Of late, there has been growing disquiet about how advanced economies, particularly the US, will service their debt in an era of non-zero interest rates. In 2023, the US government doubled its fiscal deficit to 8.8 per cent even as it carried debt amounting to 122 per cent of GDP. Neither of the political dispensations in the US seem to think of this as a serious problem.

For nations seeking to hedge against disorderly shifts in the US economy or the dollar, finding a substitute for the greenback on international payments is a tall ask. Perhaps that’s why non-Western economies are shooting from the shoulders of their central banks, to do the next best thing — stealthily add to their gold reserves.