Who's Buying Gold? You'd Be Surprised

Gold is typically seen as a safe haven where investors park their money during market upheavals. However, this doesn't seem to be the case now, during the market shock that hit in early August 2024. Why? Perhaps because gold is too cumbersome a way to safeguard funds, or perhaps because it was already overvalued due to autocratic regimes, such as China, buying it up as an alternative to assets in dollars or euros. This is because dollar and euro assets could be subjected to sanctions due to the aggressive policies of such regimes.

When the financial markets were in turmoil late last week and early this week, with stocks plummeting before our eyes, gold made a very modest rise. Normally, in such situations, it leaps up like a kangaroo. On 2 August, monthly US employment data was released, which turned out worse than expected. This increased fears of a recession and pushed the price of gold above $2,500 per ounce (31.1 grams). For instance, gold futures on the Comex exchange at one point traded at $2,506.2 per troy ounce. However, prices later dropped, so the trading tables showed figures slightly below $2,500 per ounce.

While stock prices fluctuated by several percentage points during this financial storm, gold's movements were much more restrained.

On Monday, US stock exchanges closed with significant losses, causing the Nasdaq and S&P 500 indices to fall by at least 3% each, as the market continued last week’s sell-off amidst concerns about a US recession and a sharp drop in Apple shares following news that a major investor had reduced its stake.

All three major US stock indices recorded the biggest percentage drops over three days at the beginning of August since June 2022. The Dow fell by 2.6%, the S&P 500 by 3%, and the Nasdaq by 3.4%. Individual stocks dropped even more sharply. For example, Apple fell by 4.8%. And this all happened in one, albeit the worst, day—Monday, 5 August. From the beginning of the panic attack, i.e., from 1 to 7 August, Apple’s decline was 6.7%. Did someone rush to gold? Apparently not.

Prior to this, gold futures were trading around $2,370, at the peak of the panic they hit $2,470, and by midweek, they were only $2,390. So the fluctuation in gold prices was much more modest, and the prices stabilised almost immediately.

Why such unconventional behaviour from gold?

A variety of factors coincided. First, stocks had risen sharply beforehand. For example, Apple grew by 33.7% from April to the end of July. Someone was bound to start taking profits, and this entity turned out to be Warren Buffett, with reports coming out that his investment fund was selling Apple shares. The Dow index rose by 4.2% since April, and compared to October 2023, it was up by 20.3%. However, the companies' economic indicators did not justify such a powerful rise in stocks.

Gold had been rising as well. Since the beginning of April this year, its prices fluctuated between $2,300 and $2,460 per ounce, but before that, there had been a galloping rise from about $1,800 per ounce,from October 2023 or 36.7%.

So gold was rising almost simultaneously with stocks, even slightly faster. Savvy investors were buying into it during the storm very cautiously. It seems that someone else was buying more significantly, or additional factors were pushing gold prices up, rather than the stock market storm. Who and what is influencing gold now?

In recent days, there has been frequent talk of increased geopolitical tensions and growing fears of a global economic downturn. The threats of a downturn are understandable—they have an impact, but likely less than assumed. However, the expanding conflict in the Middle East, the war on the EU’s doorstep in Ukraine, and the tension in the Taiwan Strait—all these are certainly driving gold prices up. These influences have clearly been at play since last autumn. Here, everything follows classic textbook patterns—an increase in global geopolitical instability leads to a rise in gold prices. But there's more to it.

This is the purchase of gold by central banks in countries governed by autocratic regimes. 

Recently, in July, it was reported that the People's Bank of China has stopped buying gold in May and June due to what it considered excessively high prices for the precious metal.

But China will not stop buying gold, as it has the example of Russia before it, which received rather severe sanctions due to its invasion of Ukraine. These sanctions hit Russian assets in dollars and euros the hardest, as the US and EU governments try to pressure Moscow to end its aggressive war. It seems that Beijing is not ruling out the possibility of similar actions against itself, given the high tension in the Taiwan Strait and the increasingly hardline statements from Chinese politicians regarding the region.

Want to know why gold prices have increased by more than a third over the past year? It’s the 7.23 million ounces of the precious metal bought by the People's Bank of China (PBOC) for its reserves in 2023. According to the World Gold Council, this is the largest purchase in 46 years. And, of course, China is currently the world's largest gold buyer. Recent data shows that gold constitutes only 4.6% of its foreign reserves, indicating a substantial appetite for further purchases. The value of the 72.8 million ounces of gold in PBOC’s reserves is estimated at about $170 billion out of total reserves of $3.22 trillion.

As long as Beijing continues to buy gold, its price in the global market will remain at current levels or higher, regardless of what happens in the stock markets in the US or elsewhere. This is not about economics but politics.

It's not just China increasing its gold reserves; India is also in the race. The Reserve Bank of India (RBI) purchased 9.3 tonnes of gold, or 299,000 ounces, in June, significantly more than the average monthly purchase of 5.6 tonnes in 2024. In total, in the first half of the year, the RBI bought 37.1 tonnes of gold, or 1.192 million ounces, the highest amount since 2013 and more than three times the amount bought in 2023. Overall, the RBI's gold reserves now stand at a record 840.7 tonnes, or 27.012 million ounces. The share of gold in India's international reserves is now 8.7%, up from 7.4% a year ago.

Another significant player in the gold market is the Central Bank of the Republic of Turkey (CBRT). Its foreign reserves at the end of the second quarter of 2024 amounted to $84.87 billion, of which $43.83 billion was gold, totalling 584.93 tonnes. In the first quarter of this year, the CBRT bought about 30 tonnes of gold, and in the second quarter, another 15 tonnes. Thus, in the first half of the year, it increased its gold reserves by 45 tonnes or 1.447 million ounces. The head of the RBI might well envy his Turkish counterpart.