Gold's reputation as the ultimate store of value has been tarnished by its 15% decline since the Iran conflict began. It's failed to act as a haven or a geopolitical hedge. However, that's not unusual — the pattern seen this month mirrors similar price corrections during the 2008 global financial crisis and when Covid struck in March 2020. After all, gold is easy to sell and many holders will be able to reap large profits: Despite the recent drop, it's still up by more than 50% in the past year.
One new market dynamic, though, is that central banks, the biggest gold buyers over the past four years, are starting to contemplate using some of their holdings to pay for vastly increased energy and defense expenditure. The sharp rise in energy prices has certainly hit some resource-poor countries hard and, with petrol rationing already becoming a feature in several countries, it must be tempting to raid the piggy bank. Central bankers are the custodians of national wealth, with reserves management one of their principal tasks; taking some of the profit from gold's better than 150% gain during the past five years to meet emergency needs makes sense.
According to the World Gold Council (WGC), an industry body, central banks hold more than $4.3 trillion of gold reserves. They now represent about a fifth of the market, roughly double their prior long-term presence, and this appears to be a persistent trend — the world isn't getting any more stable. China has led the accumulation since the 2022 Russian invasion of Ukraine. This diversification away from conventional dollar assets was spurred by the US Treasury's Office of Foreign Assets Control leading the West in seizing as much as $330 billion of Russia's reserves, according to the Brookings Institute. Moscow has been the largest seller of gold this year, the WGC says, perhaps to defend the weakening ruble.
ALSO READ: Gold, Silver Pare Losses As Trump Delays Iran Energy Strikes
Earlier this month, the governor of the National Bank of Poland — the biggest buyer last year, according to the WGC — raised the prospect of selling some of its stash in a meeting with the Polish president. Turkey's central bank may use gold held at the Bank of England as collateral to prop up the lira rather than outright currency market intervention, Bloomberg News reported this week. They're unlikely to be the only countries seeking to tap their reserves of the yellow metal to meet current financial needs; several major Middle Eastern and Asian countries are cited by industry website mining.com as potential sellers. This year had already seen a notable slowdown of purchases; the WGC estimates central banks bought just five net metric tons of gold in January, versus a monthly average of 27 tons last year.
Even if liquidity-driven selling pressure diminishes, it's unlikely gold will return to the speculative fervor of last year, with a shift into more of a balanced two-way market looking more probable. Some countries may resume their buying at modestly reduced prices; others may sell to pay bills. After all, that's what central bank reserves are meant to be there for.
ALSO READ: Iran Drafts Law To Impose Tolls For Transiting Strait Of Hormuz
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.