Central Bank Gold Buying: The End of an Era?

Since the situation in Iran deteriorated, the gold market has undergone intense volatility. In March, gold prices dropped as much as 16%, and Turkey began selling gold, sparking strong concerns in the market about whether the "trend of central bank gold purchases is reversing."

According to Chasewind Trading Desk, UBS's latest research report clearly states that the structural trend of gold purchases by official entities has not changed; central banks will remain net buyers of gold. Although high volatility in the short term has caused strategic buyers to temporarily step back, strong demand from the Chinese market is providing solid support for gold prices.

UBS believes the current market correction is an excellent opportunity for investors to establish strategic gold positions. As concerns about the combination of "low growth + high inflation" and heightened geopolitical tensions intensify, the medium and long-term upward trend of gold is being reinforced. UBS expects the average annual gold price to reach $5000 this year and maintains a year-end target price of $5600.

From buyers to sellers? Central bank selling panic is greatly exaggerated

The most pressing question for gold market participants is: Are central banks selling gold? Particularly as Middle East conflict may become prolonged, the market worries that central banks will have to sell gold reserves to cope with surging inflation, slowing economic growth, and currency depreciation. This concern is believed to be the main reason behind the 16% drop in gold prices in March.

However, UBS believes the likelihood of structural changes in official entities is extremely small.

UBS expects central bank gold purchases will only gradually slow down, estimating this year’s purchase volume to be between 800 and 850 tons, slightly lower than about 860 tons in 2025. During the fifteen-year accumulation of gold reserves, it’s normal for some central banks to make sales in certain months. This may be tactical profit-taking at very attractive entry levels, or triggered by portfolio rebalancing following a rise in gold prices.

The truth behind Turkey selling 50 tons of gold

Recently, news reported that the Central Bank of the Republic of Turkey (CBRT) sold about 50 tons of gold within a few weeks, drawing significant market attention. But UBS strongly warns investors not to take these headlines at face value.

Turkey has a unique approach to using gold as a policy tool. Since the introduction of the Reserve Option Mechanism (ROM) in 2011, part of Turkey's total reported gold holdings actually represent positions of domestic commercial banks. Furthermore, some of the reported sales appear to be swap transactions rather than direct sales.

UBS points out that the available data to disentangle changes in Turkey’s total gold holdings is delayed, and the market needs to await more detailed data to discern the real trend.

Strategic buyers temporarily observe, Chinese demand supports the bottom

Since 2022, central banks and official agencies' purchases have been an important support for the gold bull market. However, recent market flows show that official entities and long-term strategic investors have chosen to wait and see during recent price corrections.

Extreme uncertainty triggered by Middle East conflict at the beginning of March, together with sharply rising U.S. real interest rates and a strengthening dollar, put heavy pressure on gold prices, causing bull positions to be washed out and short selling to occur.

However, healthy and sustained demand from China (domestic prices remain at a premium) has helped limit the downward space and allowed the market to stabilize around $4,500. With the shift in market expectations for Fed rate hikes, gold prices are gradually recovering to $4,700.

Central banks’ bottom line exposed: Buy and hold remains the absolute mainstream

To address investor questions on how central banks manage their gold reserves, UBS cites the World Bank’s “Fifth Biennial Reserve Management Survey” released late last year (covering 136 institutions).

The data reveals the real logic behind central bank gold management:

1. Lack of quantitative decision-making: Most central banks decide on their gold holdings based on "historical legacy considerations" (about 47%) and "qualitative assessments" (about 26%), rather than quantitative portfolio optimization models. Only about a quarter of central banks include gold in official strategic asset allocation frameworks.
2. Very little short-term trading: In terms of investment style, up to about 62% of central banks adopt a "buy and hold" strategy. Most importantly, only about 4.5% of central banks say they make short-term tactical adjustments to gold reserves.
3. Core drivers for increasing holdings: Among central banks reporting changes in gold reserves in 2024, more than half say "diversification" is the strongest driver for increasing positions. Other main reasons include domestic gold purchase programs (about 35%) and geopolitical risks (about 32%). Only about 6% of central banks say liquidity needs are reasons for changing positions.

Correction is a good opportunity for strategic accumulation

Although gold prices may face more consolidation and volatility in the coming weeks as the market continuously reassesses geopolitical risks, UBS firmly believes the long-term fundamentals of gold remain strong.

Speculative positions are currently quite clean, while long-term market participants remain underinvested.

UBS emphasizes that price corrections are opportunities to establish strategic gold positions. Due to first-quarter mark-to-market adjustments, UBS has slightly revised its prediction for the average annual gold price this year from the previous $5,200 to $5,000, but is firmly maintaining the year-end target price set at the end of January of $5,600.

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The above highlights are from Chasewind Trading Desk.

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