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Central Banks Keep Buying Gold as US Debt Costs Top $1 Trillion

The PRICE to BUY GOLD tested 3-week lows against most major currencies in London trade Wednesday, falling even as longer-term interest rates on US government debt eased further from last month's multi-year highs while more central banks said they kept buying gold in October, extending the official sector's post-war record run of bullion demand. 
Falling $50 from late-October's 5-month highs above $2000 per Troy ounce, the price to buy gold with US Dollars has now averaged $1930 in 2023 so far, rising 7.2% from last year's new annual record despite a steep drop in private-sector gold buying, led by a 6.9% drop in the size of gold-backed ETF trust funds worldwide.
Central banks, in contrast, are on track to match if not beat 2022's post-1945 record according to estimates from the mining industry's World Gold Council, with Europe's No.1 buyer Poland reporting a further 6 tonnes of purchases today, expanding its reserves 48.5% by weight since New Year to 340 tonnes.
No.1 gold-buying central bank China yesterday said it acquired another 23 tonnes in October, growing its bullion reserves by 10.1% so far this year to 2,215 tonnes on its official data and fast approaching former No.1 buyer Russia's holdings, currently the 5th largest national hoard.
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Estimates from the World Gold Council analyzed by BullionVault suggest that central bank gold buying has risen by more than one half by weight over the past 3 years compared with the previous 12 calendar quarters.
Visible demand for private investment in contrast – including gold bars, coins and gold-backed ETF trust funds such as the giant GLD listed on New York's stock market – has fallen by 1/3rd, down by 33.5% as central bank gold buying has risen by 54.4%.
Chart of visible private-investment demand for gold vs. estimated central-bank purchases. Source: BullionVault using WGC data
"[China] may be buying gold to reduce its exposure to US Dollars and, consequently, to the possibility of sanctions," says Michael Pettis, professor of finance at Guanghua School of Management at Peking University in Beijing, acknowledging a motive for central-bank gold purchases which many analysts, historians and economists believe has grown stronger since Russia was hit by US-EU sanctions over its ongoing invasion of Ukraine starting in early 2022.
"But the scale is still pretty small" compared to China's Dollar-debt holdings, Pettis goes on, "mainly because the US is the only country willing and able to run large [trade and government] deficits, [making it] the main provider of assets against which countries like China can accumulate surpluses."
"In aggregate," says Brad Setser, a senior fellow at the Council on Foreign Relations expert in global trade and capital flows, "foreign demand for US bonds has actually been pretty strong, in line or above the post global crisis norm.
"The underlying issue though remains the same – absent a big rise in the US current account deficit or some new unknown foreign source of demand, the bulk of new note issuance will need to be absorbed domestically (and obviously the Fed is adding to net supply)."
Latest data today say that the Federal Reserve's total assets shrank again last week, down to the smallest since May 2021 and almost 1/8th below the peak of spring 2022 as US central bank slowly withdraws some of its huge QE monetary stimulus while holding overnight interest rates at the highest in 2 decades in a bid to cool inflation.
This year's drop in Treasury bond prices, driving longer-term borrowing costs higher, means that annualized interest payments on the US government's outstanding debts "climbed past $1 trillion at the end of last month" according to analysis by Bloomberg.
"That amount has doubled in the past 19 months, and is equivalent to 15.9% of the entire Federal budget for fiscal year 2022."
China's latest gold buying "[is] adding to a wave of purchases by global central banks that's lent support to bullion prices," says a separate Bloomberg story.
This century's former No.1 buyer Russia hasn't officially reported any growth in its gold bullion reserves so far this year.
With Israel continuing its invasion of Gaza following the dreadful Hamas atrocities of 7th October, Moscow was hit Wednesday by further sanctions from the UK government targeting its giant mineral and energy sector revenues – including "a United Arab Emirates-based network responsible for channelling more than $300 million in gold revenues to Russia" – as part of Western attempts to disrupt President Putin's war in Ukraine.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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