Central banks will keep buying gold as dollar sanctions shift long-term strategies on currency reserves

Reuters/Mike Segar

• Demand for gold among central banks will likely remain strong, UBS said in a note.
• Analysts cited elevated geopolitical risks and inflation, predicting gold to hit $2,100 by the year's end.
• The freezing of Russian currency reserves "may have led to a long-term impact on the behavior of central banks."

Demand for gold among global central banks will likely remain strong, even after a record year of purchases, according to UBS.

In 2022, central banks bought 1,078 metric tons, the highest annual demand for gold since record-keeping began in 1950 and more than double the 450 metric tons purchased in 2021, strategists said in note on Thursday.

And based on first-quarter numbers, central banks are on pace to buy 700 metric tons this year, UBS estimated, down from 2022 but still above the average of 500 metric tons since 2010.

"We think this trend of central bank buying is likely to continue amid heightened geopolitical risks and elevated inflation," UBS said. "In fact, the US decision to freeze Russian foreign exchange reserves in the aftermath of the war in Ukraine may have led to a long-term impact on the behavior of central banks."

The US dollar traditionally has been a mainstay of central bank reserves. But the recent surge in demand for gold has been seen as a sign of de-dollarization after the greenback was used to put financial pressure on Russia for its war on Ukraine.

Among the top central banks buying gold are those in countries that are seeking to displace the dollar's dominance in global finance or trying get around Western currency sanctions, namely China, Russia and India.

This sustained high demand from central banks is one of the reasons UBS thinks gold will climb to $2,100 per ounce by year-end and $2,200 by March 2024. Gold dipped back below $2,000 over the past week but is still up 8% so far this year.

Another factor that will help gold rally is weakness in the dollar. According to UBS, the dollar is set to decline further as the Federal Reserve looks ready to pause its tightening cycle while other central banks continue to raise their rates. 

"Gold has historically performed well when the US dollar softens due to their strong negative correlation, and we see another round of dollar weakness over the next 6-12 months," the note said.

A third factor in favor of gold is rising US recession risks, with UBS noting deterioration in GDP, construction, manufacturing, and consumer sentiment. Tighter credit conditions will also likely weigh on economic growth and corporate earnings, analysts added.

Meanwhile, worries about the debt ceiling are also encouraging a gold rally. While most observers still believe a default is unlikely to happen, other analysts previously told Insider that a default would lift gold and could even send it to a new record high.