Demand increased to the 11-year high with the support of central banks last year

Demand for gold rose to the 11-year highest level in 2022, aided by both the “colossal purchases by central banks” and active interest of retail investors in investment gold, according to the World Gold Council (WGC).

Annual gold demand jumped 18 percent to 4741 tonnes, excluding over-the-counter (OTC) transactions. This represents the largest demand since 2011, and in the fourth quarter, demand reached a record high of 1337 tonnes.

Central banks around the world were especially active in purchasing gold – a total of 1136 tons of the yellow metal was acquired last year, which is the highest figure since 1967. According to data collected since 1950, the amounts purchased rank second in size. Compared to the previous year (2021), there was a 150% increase in gold purchased.

Demand for gold rose nearly to the 2011 record level. Central bank purchases are marked in red, physical investment demand in purple, and jewelry demand in light green. Source: WGC, Metals Focus

Geopolitical tensions and looming inflation

“Geopolitical tensions and high inflation were the main reasons for buying and holding gold,” the WGC wrote in its report. Central banks’ interest in gold has increased because it is known how the precious metal protects against crises and preserves its purchasing power in the long term. “So it is no surprise that during a year characterized by geopolitical uncertainty and rampant inflation, central banks began to increase their purchases.”

The last time central banks purchased this much gold was when the US dollar was backed by gold. Americans abandoned the gold standard established at the Bretton Woods conference in 1944 in 1971 because high social expenditures and the Vietnam War forced the creation of so much money that it could no longer be fully backed by gold.

“Central bank purchases show that gold remains a highly important asset in the financial system. Although gold is no longer used as a currency backing, it is still held onto. Why? Because it is a tangible asset,” said Juan Carlos Artigas, head of research at the World Gold Council.

It is not exactly known who is buying gold

The report states that the identity of the central bank making a significant portion of the purchases is unknown. During the second half of the year, only a quarter of the purchases were reported, and it is believed that the People’s Bank of China is primarily behind the large and concealed purchases. China officially reported purchasing 62 tons last year.

Turkey officially purchased the most gold, a total of 148 tons, bringing their gold reserves to a record level of 542 tons. Inflation in Turkey accelerated to 85 percent in the fall.

The World Gold Council (WGC) stated that if information regarding unreported purchases becomes available, the numbers may be adjusted. Other major buyers include India, Egypt, Qatar, Iraq, and the United Arab Emirates. There were few buyers among advanced country central banks, but there were also no major sellers.

It is worth noting that central banks have been net buyers of gold (purchasing more than they sell) for the past 13 years.

The demand for investment increased

The demand for gold investment increased by 10% compared to the previous year, reaching 1,107 tons. There was also outflow of gold from exchange-traded funds (ETFs), but less than in 2021.

The demand for jewelry declined by 3% in 2022, reaching 2,086 tons. The demand decreased mainly at the end of the year, as the price of gold began to rapidly increase after reaching its bottom in November.

The supply of gold increased by 2% last year, reaching 4,755 tons. Mine production was 3,612 tons, the highest in the last four years.

It is difficult to surpass the demand from the previous year

The World Gold Council has acknowledged that it will be difficult to surpass the high demand of last year in 2023, as purchases were historically large.

“It is reasonable to believe that central bank demand will not be as strong in 2023 as it was last year,” the report stated. “Central bank reserves are growing at a slower pace, making it difficult to continue actively buying gold. So we believe that demand in 2023 will be moderate.”

In addition, it was stated that it is difficult to predict central bank demand, as it is influenced by policy.

We encourage you to read about Gold Demand Hitting Nearly a Decade High in 2022 Driven by Bullion and Central Bank Purchases and What is Driving the Recent Surge in Central Bank Gold Purchases to 55-year highs to develop a deeper understanding about the newly rekindled relationship between central banks and gold.