Gold plunges after "China shock" and tough US stance: How will "sharks" buy and sell?

After peaking at $2,450 an ounce on May 20, the spot gold price on the world market has plummeted. Along with the US Federal Reserve's (Fed) delay in cutting interest rates due to its caution with inflation, the gold price has fallen to $2,310-2,330 an ounce in recent days.

In fact, the shock of the People's Bank of China (PBOC) stopping gold purchases in May after 18 consecutive months of net purchases had a strong impact on the psychology of gold investors in the international market.

However, demand for precious metals is forecast to remain high and increase in the coming time, coming from the "sharks" which are central banks of various countries.

In a report recently released by the World Gold Council (WGC), many central banks are planning to add gold to their foreign exchange reserves in the next 12 months, due to ongoing political and macroeconomic instability. Countries will continue to buy gold even if the price of gold increases.

According to a WGC survey, 29% of 70 central banks expect to increase gold reserves in the next 12 months, higher than the 24% expected to do so in 2023.

29% is also the highest since the WGC began the survey in 2018.

According to WGC, the reason countries are increasing their gold purchases is because of concerns about crisis risks as well as rising inflation.

According to the survey results, up to 81% of central banks participating in the survey said that they expected global central bank gold reserves to increase in the next 12 months. This figure is higher than the 71% done a year ago.

The WGC survey was conducted two weeks after the PBOC announced that China's central bank did not add any gold to its reserves in May. The PBOC had previously recorded 18 consecutive months of net gold purchases.

News that China stopped buying gold in May caused strong fluctuations in the international gold market. Gold prices fell sharply.

However, according to WGC, analysts said that even if China reduces its gold purchases, interest in the precious metal remains strong, as countries step up diversification of foreign exchange reserves amid rising geopolitical tensions around the world.

Countries are also diversifying their foreign exchange reserves as the US dollar’s ​​role as a global reserve currency declines. The WGC said that 62% of central banks believe the US dollar’s ​​role will gradually decline over the next five years. In 2023, 55% of central banks believe so, and in 2022, 42%.

In addition to China's halt in buying, gold is also under pressure from a still-high dollar as the Fed delays rate cuts due to concerns about rising inflation.

In the short term, gold is expected to perform negatively following tough anti-inflationary decisions by the US. However, the Fed is expected to cut interest rates once this year, and four times in 2025. At that time, the USD is expected to fall rapidly and gold may climb.

Gold price movements will also depend heavily on the outcome of the US election in November. The White House chief’s views will largely determine international affairs.