Schroders: Central Bank Gold Demand Has 'Very Long Runway' as East-West Split Returns

Central Banks Extend Gold Buying Spree Amid De-Dollarization Push

Global central banks have been net buyers of gold for over a decade, and Schroders sees no near-term end to the trend. In a recent note, the asset manager highlighted that official sector demand has a "very long runway" as many emerging-market central banks, particularly in Asia and the Middle East, continue to increase their gold reserves. The buying is driven by a desire to diversify away from the US dollar and hedge against geopolitical risks.

According to the World Gold Council, central banks added 1,037 tonnes of gold in 2023, the second-highest annual total on record. Schroders expects similar or higher levels in 2024, as countries like China, India, and Turkey remain active buyers. The trend marks a return of the East-West divide in gold markets, where Eastern central banks accumulate bullion while Western central banks have largely been net sellers or holders.

What's Driving the Structural Shift in Gold Demand

De-Dollarization and Reserve Diversification

The primary catalyst for central bank gold buying is the gradual de-dollarization of global reserves. Following the freezing of Russian central bank assets in 2022, many countries now view gold as a sanctions-proof reserve asset. Schroders notes that gold offers no counterparty risk and is not subject to seizure by foreign governments, making it an attractive alternative to dollar-denominated bonds.

Central banks in Asia and the Middle East are leading the charge. China's People's Bank has added gold for 18 consecutive months through July 2024, while India's Reserve Bank has been a steady buyer. These purchases are part of a broader strategy to reduce reliance on the US dollar, which still accounts for nearly 60% of global foreign exchange reserves.

East vs. West: A Tale of Two Gold Markets

Schroders points out that the gold market is increasingly bifurcated. Eastern central banks are buying, but Western investors—particularly in Europe and North America—have been less enthusiastic, with gold exchange-traded funds (ETFs) seeing net outflows in 2023 and early 2024. This divergence reflects differing macroeconomic priorities: Eastern economies are focused on reserve security, while Western investors are more sensitive to interest rate dynamics and the opportunity cost of holding non-yielding gold.

However, Schroders argues that the East-West split could eventually narrow if Western central banks also pivot toward gold, especially if geopolitical tensions escalate or the dollar's dominance erodes further. For now, the buying spree from Eastern central banks provides a solid floor under gold prices.

Key Levels and Assets to Watch for Traders

For traders monitoring the gold market, the key level to watch is the all-time high near $2,450 per ounce, reached in May 2024. A sustained break above that level could open the door to $2,500 and beyond, driven by continued central bank buying and potential Fed rate cuts. On the downside, support is seen around $2,300, where central bank buying has historically intensified.

Traders should also track the US Dollar Index (DXY), as a weaker dollar typically boosts gold. Additionally, real yields (TIPS) remain an important driver—if they fall further, gold becomes more attractive. For those looking to trade gold, consider using technical indicators like the 50-day moving average to gauge momentum.

What This Means for Traders: Structural Support vs. Tactical Headwinds

The central bank buying narrative provides a strong structural tailwind for gold, but traders must weigh this against short-term headwinds. The Federal Reserve's interest rate stance remains a key variable: if the Fed keeps rates higher for longer, the opportunity cost of holding gold rises, potentially capping price gains. Conversely, rate cuts would remove that drag and could ignite a rally.

Geopolitical risks, such as the Ukraine-Russia war or Middle East tensions, could accelerate central bank buying and push gold higher. However, a sudden shift in risk sentiment (e.g., a global recession) might trigger liquidations, as seen in March 2020. For traders, the best approach is to treat central bank demand as a long-term anchor, but use signal rooms to stay nimble around key data releases like CPI or Fed decisions.

Another risk is that the East-West split could widen if Western investors remain on the sidelines, limiting upside. But if Western central banks join the buying, that would be a game-changer. For now, the path of least resistance for gold appears higher, supported by a structural shift in global reserve management.