THE Gold prices are falling by more than two percentage points in the raw materials market in the last session of the week. The sales began after the People’s Bank of China released data on purchases made in May. The Chinese Central Bank left the amount of gold held unchanged at 72.80 million ounces, breaking an 18-month stretch of consecutive net purchases. The value of gold reserves rose to 170.96 billion dollars compared to 167.96 billion dollars in April while foreign exchange reserves went from 3,200.8 billion dollars at the end of April to 3,232 billion dollars at the end of May.
The PBoC is the central bank that has purchased the largest quantity of bullion in recent years, making a decisive contribution to the constant updating of the historical highs of the precious metal’s prices. According to data from the World Gold Council, the Chinese monetary institute made net purchases of 7.23 million ounces last year. However, in recent months the trend has slowed down as gold prices have broken historic records: in February purchases amounted to 390 thousand ounces, in March 160 thousand ounces and in April just 60 thousand ounces. “China hasn’t stopped buying gold yet, but the pause also highlights that these are human beings who don’t want to make purchases at record prices,” explained Ole Hansen, head of commodity strategy at Saxo Bank.
Gold: what to expect on prices after the PBoC slowdown?
Since September 2022, gold has embarked on a disruptive rally, going from a low of $1,622 per ounce to a all-time high of 2,464 dollars last month. The overwhelming rise was not only determined by the massive purchases of the central banks, but also by the need of investors to take refuge in a safe harbor in the face of global tensions and the slowdown of the economy. In recent months, the precious metal has also drawn strength from the expectation of a cut in interest rates by central banks. The reduction lowers the market yield of other competing safe-haven assets such as U.S. government bonds and the U.S. dollar. In fact, since gold is an unprofitable asset, the opportunity cost of holding it decreases when returns are lower.
What to expect now after the slowdown in PBoC purchases? According to Hansen, currently “gold is still consolidating and this news will likely prolong the consolidation phase.” However, overall “the long-term bullish outlook has not changed,” he added. Nicholas Frappell, global head of institutional markets of the Australian ABC Refinery, one of the main refiners of precious metals in the world, does not appear surprised, especially given the increase in gold prices which makes it less convenient purchases. “It would be surprising if the PBoC announcement represented anything other than a pause in the overall trend of continued demand,” he said.
