Gold’s glorious glitter

GOLD is all the rage now. The rush for physical gold is leading to shortages. It is also bringing back an old discussion – how much gold do central banks keep, why do they keep it and where do they keep it?

Central banks are the biggest buyers of gold. A significant portion of this gold is held in storage at the Bank of England (BoE), which has been the world’s primary custodian of gold for centuries.

A mix of factors is now fuelling interest in gold, a key one being macroeconomic jitters with the new Trump administration announcing significant tariffs on imports from Canada, Mexico and China.

Throw in the growing distrust of fiat currency stability, and capital has been sent flowing toward gold, says SPI Asset Management’s managing partner Stephen Innes.

According to him, central banks, particularly in emerging markets, are rushing to stack up bullion, reinforcing its role as a strategic reserve asset and a hedge against inflation.

“The gold market is ablaze. Spot prices have been on a tear but what’s even more intriguing is the velocity in the futures market, which is outrunning the spot like a trader front-running a Fed pivot,” Innes tells StarBiz 7.

He says the divergence between the spot and futures markets signals aggressive positioning, suggesting that big players aren’t just in it for the paper trade; they want the “real thing”.

At the time of writing, the spot price of gold was US$2,963.20 – up by 12% since the start of the year. Compared to a year ago, prices have risen by about 45%

According to Innes, the bullish tilt in the futures curve suggests demand for physical gold is outpacing supply, leading to whispers of a potential squeeze.

“If this momentum continue, gold could see fresh legs with key resistance levels at US$3,000 and beyond,” he predicts.

Is London losing its shine as a gold hub?

The hub for gold activity is London due to its long-established infrastructure and regulatory framework provided by the London Bullion Market Association (LBMA) for both physical and paper gold.

Paper trading in gold is done through the futures market, where investors enter into contracts to buy or sell the metal at a future date for an agreed-upon price. These contracts allow traders to speculate on gold price movements without physically owning the metal.

However, the reliability of the LBMA’s paper contracts is being questioned, especially following the large outflows of physical gold from the BoE to New York in recent months as traders aim to capitalise on the higher premiums on New York’s Comex futures market.

In January alone, the BoE saw a record outflow of about 8,000 gold bars, or about 2% of its total gold reserves. Elsewhere, JPMorgan Chase plans to transfer some US$4bil worth of gold from London to New York.

However, the market is facing unprecedented delays in physical gold deliveries with wait times extending to four to eight weeks from the usual few days, it has been reported.

“Reports of delays in physical deliveries and large outflows from the BoE’s vaults are fuelling speculation that the market may be tighter than it appears.

“If true, this could amplify the already bullish sentiment and lead to an even more pronounced divergence between physical and paper gold markets,” says Innes.

In recent years, other countries have also been moving gold out of London. Last year, India brought home about 100 tonnes of gold. Since the Russia-Ukraine conflict, India reportedly acquired gold at a faster pace than any other Group of 20 country, surpassing both Russia and China.

Although fiat currencies are no longer backed by gold, it remains the bedrock of “financial insurance” for nations that aren’t keen on putting all their eggs in the US dollar basket.

Innes says China, India, and Turkiye have been quietly but steadily increasing their gold reserves, “a move that speaks volumes about their long-term view on currency risk and global economic stability.”

“These nations are diversifying away from the US dollar hegemony, using gold as an anchor to hedge against potential currency debasement and geopolitical risks.”

The US, Germany, France and Italy have around 70% in gold as a percentage of their total reserve holding, a recent JP Morgan report showed. Russia and Turkey hold about one-third in gold.

Some central banks like the Reserve Bank of Australia (RBA) also engage in gold lending to generate additional yield.

However, it can be a double- edged sword, exposing the lender to counterparty risk, especially with the risk-reward calculus more complex due to surging demand.

Bank Negara, though, is more conservative. The local central bank’s gold holdings have been relatively stable, having risen on average around 5%-6% over a decade.

Replying to StarBiz 7 queries, Bank Negara says it does not publicly disclose specific details of its investment strategies and intentions.

“Bank Negara maintains a well-diversified international reserves portfolio that includes a variety of highly liquid financial assets, such as gold.

“The allocation of international reserve investments ensures sufficient foreign exchange liquidity while meeting the long-term objectives for capital preservation and reasonable return,” the central bank states in a written reply.

Economist Anthony Dass says Malaysia’s stable approach reflects its diversified economic structure and tailored monetary policies.

“We are relatively diversified, thus reducing the need to rely heavily on gold as a hedge against economic volatility.

“Our currency regime is no longer backed by gold, so Bank Negara has the flexibility to manage reserves in a manner that reflects a balance between maintaining sufficient gold reserves and other foreign assets to support domestic economic needs,” he adds.

As for Malaysia’s value proposition, Dass says the country has a history of gold mining, although its contribution to the global gold supply is modest.

But with its developed financial infrastructure and strategic location, he thinks the country is well-positioned to serve as a gateway for gold trading between Asia and the rest of the world.

Are the days of LBMA paper contracts numbered?

Coming back to the LBMA paper contracts, some believe it may be discontinued in favour of a more physically-backed system.

If so, there are benefits and drawbacks for the gold market, says Dass.

“Liquidity and flexibility might be affected, but the move could enhance market transparency and reduce speculative trading, potentially leading to more stable gold prices,” he says.

For the time being, demand for physical gold is surging, and traders are positioning themselves for what could be an extended rally. Whether this is just another cyclical push or the beginning of a structural shift in gold market dynamics remains to be seen, says Innes, who thinks that gold’s lustre is unlikely to fade anytime soon.

Strategists at JP Morgan forecast prices to reach US$2,900 to US$3,000 by mid-year and US$3,100 to US $3,200 by year-end. Meanwhile, Goldman Sachs Group raised its year-end target to US$3,100 last week.