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Gold Near Six-Month Lows, But It Could’ve Had A Worse Year

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Key Takeaways

  • Rising yields, a strong dollar, and expectations of higher interest rates have pressured gold prices, which fell Friday to their lowest since March.
  • Central bank purchases of gold hit a first-quarter record earlier this year, and an annual record last year.
  • Chinese buyers also have raised their purchases of the precious metal, as a weakening yuan, low yields on government bonds, and an economic slowdown have boosted gold’s appeal.
  • On the other hand, Indian gold demand could fall to a three-year low amid high inflation and the driest August in more than a century, which affected farmers’ disposable income.

Gold prices, which traded below $1,865 per ounce on Friday, have fallen to their lowest level since March amid rising yields and expectations of higher interest rates.

Gold’s Recent Pullback

When bond yields rise, it lowers the appeal of investing in gold, which earns no interest. An appreciating dollar, which rose Thursday to its highest level since December, has also pressured gold prices.

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Despite recent losses, gold prices are still up roughly 2% year-to-date. The SPDR Gold Trust (GLD), one of the biggest exchange-traded funds (ETFs) tracking gold prices, is now flat for the year.

But gold could’ve had a worse year. Central banks and Chinese buyers have exhibited a strong appetite for gold so far this year, while India, a historically large consumer of gold, may see demand fall.

China and India together account for roughly half of global demand for gold. “Obviously, it varies, but it’s between 50% and 55%—give or take—of overall demand for jewelry, coins, or bars,” Rhona O’Connell, head of market analysis for EMEA and Asia at institutional financial services network StoneX, said in an email.

Central Banks on a Gold-Buying Spree

Central banks have ramped up their purchases of the yellow metal. Gold buying by central banks hit a first-quarter record earlier this year, according to the World Gold Council, with those in Singapore, China, and Turkey among the biggest buyers. Last year, central banks around the world bought a net 1,136 tons—the highest amount of any year since recordkeeping began in 1950—in the face of rising geopolitical uncertainty and high inflation.

Robust Demand from China

Buyers in China also have increased their purchases of the metal, as a weakening yuan, low yields on government bonds, and an economic slowdown have added to gold’s appeal in the country. The People’s Bank of China (PBoC) has been one of the world’s biggest institutional buyers of gold, increasing its holdings of the metal by 155 tons since the start of 2023.

Meanwhile, government-imposed limits on gold imports have raised the price premium of Chinese gold relative to international prices to the highest on record. Per-ounce bullion prices on the Shanghai Gold Exchange broke above $2,000 earlier this week, and traded roughly $120, or 6%, higher than gold priced in London or New York.

Indian Demand Could Hit 3-Year Low

But a drastically different backdrop is emerging in India.

Rising inflation, elevated domestic prices for gold, and a drier-than-average monsoon season, which featured the driest August in more than a century, could cause gold demand in India to fall 10% this year to the lowest in three years, the World Gold Council said.

India’s monsoon season, which typically runs from June to September, can affect the disposable income of a wide swath of India’s population that earns its livelihood from agriculture. Adequate rainfall leads to higher agricultural output, which in turn increases disposable income for farmers and allows them to spend more on gold, particularly gold jewelry, which is highly sought-after in rural parts of India.

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