Yellow fever: Central banks and private investors keep demand for gold buoyant

Private investors and consistent demand from central banks were the two driving forces behind the second quarter’s all-time high gold price, an industry report has found.

Individual purchases in gold on the metal’s over-the-counter (OTC) market – the main avenue through which investors buy and sell physical gold – surged fivefold over the three months to June to 392.9 tonnes.

Demand in the market, which is famously hard to trace due to its opaqueness, was also up considerably on a year-on-year basis, rising 50 per cent from the 215 tonnes seen in the second quarter of 2023.

The metal’s reputation as a safe haven asset pushed its price up 18 per cent in the past year, the report from the World Gold Council said, as investors continue to seek places of refuge from stickier than expected inflation and a continually febrile geopolitical landscape.

Demand for gold was given a further boost by central banks, whose demand for the metal rose six per cent year on year to 184 tonnes, despite the People’s Bank of China putting the brakes on its gold buying programme in May over price sensitivities.

The rise continues the pattern we have seen for much of the last two years at central banks. Demand has been driven largely by non-western states who, on top of geopolitical and inflation considerations, have hoovered up the metal in favour of US dollar reserves, after the West’s decision to immobilise much of Russia’s $350bn (£272bn).

Rising levels of US government debt – which is now at 124 per cent of gross national product – have also been a factor in central banks’ minds, the report said, with fears that a Trump presidency could lead to even more borrowing.

Louise Street, the World Gold Council’s lead analyst, told City A.M.: “Central banks are going to continue to buy quite strongly… [our central bank survey] continues to show that a very high number see gold allocations continuing to increase in the next 12 months.”

Strategists have questioned the long-term value of gold due to the rise of bitcoin, which has been framed as a rival safe haven due to its liquidity and scarcity; a view that would only become more prevalent as Trump and the Republican Party float the cryptocurrency’s adoption as a reserve currency in the US.

But Street believed the anecdotal accounts hadn’t manifested themselves in hard evidence, saying: “There has been a lot of headlines about people [switching out of gold and into bitcoin] in the last two years, but the research we have done shows that people don’t actually do that. People do understand that they are different things.

“Investors are more likely to say they own both of them at the same time and say that they own them for different reasons.”

The sky-high gold price – which on Tuesday was changing hands at £1,861/oz, a near-25 per cent increase year-on-year – did cause a dent to the consumer market in the second quarter. Demand for gold in jewellery fell 19 per cent in the second quarter compared with last year.