GOLD BUYING: Gold discount reaches highest level in last 10 months as domestic sales hit due to jump in prices
Gold Buying: Due to the purchase of gold by central banks, the demand for gold reached an 11-year high. Fearing an economic slowdown, central banks are buying gold mainly to diversify their forex baskets. Domestic sales take a hit in India with prices hitting the highest level in the last 10 months, indicating low demand, high volatility, and uncertainty
Central banks Gold buying: Gold purchases by central banks reached a new record high for the second time in 2022. Due to this, the demand for gold reached an 11-year high. Actually, due to the fear of economic recession, central banks are buying gold every year. Central banks are mainly buying gold to diversify their forex basket. Domestic sales in India have taken a hit with prices reaching the highest level in the last 10 months, indicating low demand, high volatility, and uncertainty.
Due to these reasons, the purchase of gold has increased.
Due to the return of the epidemic, the war between two European countries, reduction in liquidity, high volatility, jump in commodity prices, currency war, increase in inflation, etc., many economies were in recession in 2022. Even though investors have been investing in gold during times of uncertainty, bond yields were also very attractive with the precious metal being a safe haven. On the other hand, the central banks also seemed to be affected by the same.
Other countries including India also increased the purchase of gold
The currency of any country is evaluated with its foreign exchange reserves. Most countries hold the dollar in exchange for long-term bonds. In 2022, the Indian rupee has weakened significantly against the dollar. The RBI used its forex reserves to control the rupee, while also diversifying with investments in gold. Other countries like China and Russia did the same thing. Due to the purchase of central banks, the demand for gold reached an 11-year high in 2022 and the purchase increased by 18 percent to 4,741 tonnes. It remained almost equal to 2011.
The last time central banks bought this much gold was in 1967 when the US dollar was also backed by the metal. Central banks preferred to diversify their currency reserves or buy dollars.
What should a retail investor do?
Should retail investors also follow the path of central banks? No, it is not necessary. In fact, buying by central banks has pushed gold prices so high that there are very few consumers at that level.
Gold discount has reached the highest level during the last 10 months, as domestic sales have been hit due to a jump in prices. According to Reuters, dealers are offering discounts of up to $42 an ounce over official domestic prices, while as of last week, the discount stood at $24.
Gold ETFs are also not buyers in the market. They were a net seller with 110 tonnes sold in 2022, with the US leading the way.
Central bank purchases are one of the reasons gold prices remain stable. This is the trickiest piece of the gold price puzzle. Most of the news related to central banks comes late and due to this, it is difficult to determine the demand.
However, one thing is certain gold has become an integral part of foreign exchange reserves. It may be risky for an investor to buy gold at the current levels. A reduction in discount indicates actual buying, which is a good bullish sign.
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