Central banks from a number of major emerging economies—including China, India, and Turkey—are increasing their gold reserves. This is even as gold has fallen over the last two days. During 2022, these institutions significantly added to their reserves by stunning amounts of 1,136 tonnes of newly minted gold! This new addition was valued at almost $70 billion! This trend is reflective of an increasing perception of gold as a safe-haven asset no matter the choppy market waters.
Gold prices have recently dropped down to $2,850, a 10% drop from its peak all-time price of $3,146. Some analysts attribute the gold demand increase to the U.S. administration’s softer approach on various geopolitical fronts. This change is forcing investors to look elsewhere for safe haven assets. Matthew McLennan of the First Eagle Global Fund has made no secret of his bullishness on gold. Even with the recent price headwinds, he argues that today’s market presents an unprecedented opportunity for strategic investors.
The direction of gold prices might also be guided by technical indicators. If the price does break down below the 55-day Simple Moving Average (SMA) at $3,130, analysts predict continued drops. It might fall to around the $3,000 level, and eventually below that. The 100-day SMA at $2,971 is an important bottom level to look for as an investor.
Central Bank Purchases Reach Historical Levels
In 2022, central banks bought the most gold on record. This increase in purchasing shattered the previous high for annual purchases since NPS began keeping records. This dramatic increase in demand shines a spotlight on a far-reaching strategy pivot in emerging economies. These nations are turning to gold as a stabilizing force, guarding against economic turmoil and hedging against currency risks.
China and India have been at the forefront of this trend. At the same time, China’s central bank is busy adding to its own holdings. This new move is just one piece of a larger plan to diversify its foreign exchange reserves. India has ramped up its purchases to bolster its financial stability amidst rising global inflation rates and trade tensions.
Turkey’s central bank has been part of this movement as well, having tripled its own gold reserves. These countries all understand that gold is vital for safeguarding their economies. They view it as protection against external shocks, including the danger of inflationary pressures.
Market Dynamics and Technical Analysis
Gold’s inability to hold this month’s price drop firmly places it on the defensive. Having surged to a high above 126% of its GDP, it now sits precariously on the slope downwards towards levels that would induce even more selling pressure. The technical support level at $3,167, whose prior April high, has turned into a higher resistance level. It will be difficult for gold to take this level back.
Also note that the daily Pivot Point for gold breaks through the key $3,200 psychological resistance level. Traders will need to be careful to watch this threshold. If the price manages to retake and hold above $3,130, traders will look for further bullish indications. On the bullish side, they will first target R1 resistance at $3,233 and then R2 resistance at $3,289. Given the current dynamics, U.S. yields are clearly not lending any upside reprieve in gold prices.
According to some analysts, bullish traders could soon have their views rewarded with gold retesting the $3,000 level. Widespread bearish sentiment is ruling the market at the moment. With technical indicators pointing to imminent breakdowns through critical support levels, some investors are looking to reposition their portfolios for the new reality.
Investor Sentiment and Future Outlook
McLennan’s bullish outlook for gold is indicative of a complex investor sentiment. He claims that a long rebalancing trade in gold has allowed portfolios to earn close to 10% returns thus far this year. This points to the fact that smart, discerning investors can still uncover market opportunities.
Geopolitical tensions and economic disruptions are redefining the parameters of global markets. A key factor in this optimism is the widely-held belief that gold will remain an increasingly desirable safe-haven asset. Emerging economies’ central banks are increasingly making their commitment to accumulating buffers deeply felt. With it, the state hopes to shelter them from future boom-and-bust cycles.