Geopolitical Tensions Drive Central Banks to Bolster Gold Holdings

Investors got some superficially good news on the economy this week. But it turned out to be bad news for markets.

Equities and precious metals markets sold off on Thursday following government data showing that the economy grew faster than expected in the third quarter. GDP was revised upward to a 3.2% annual pace from July through September.

Of course, a lot has happened since then, including additional rate hikes by the Federal Reserve. It will be well into next year before the full impact of higher borrowing costs get reflected in the economy.

But the backward-looking positive GDP number makes it more likely that the Fed will hike again at its next meeting. And since markets are forward looking, they are now pricing in that likelihood.

For the week, precious metals markets are showing some resilience. Gold prices are up a very slight 0.2% since last Friday's close to trade at $1,804 an ounce. The yellow metal has traded above and below the $1,800 level multiple times over the past three weeks. Bulls will be looking for a clean move above this area of indecision in the days ahead, though we may have to wait until the New Year for more decisive price action.

Turning to silver, the white metal is up 2.1% this week to bring spot prices to $23.95 an ounce. Platinum is also up 2.1% to check in at $1,031. And finally, palladium has been slumping of late but is essentially unchanged for this week now at $1,787 per ounce as of this Friday midday recording.

Looking ahead to 2023, inflation risk, recession risk, and interest rate risk could continue to weigh on financial assets. In that environment, precious metals have the potential to emerge as appealing safe-haven assets.

Stock market bulls encouraged by government economic data see the potential for the U.S. economy to avoid moving into a deep recession next year. However, currency traders weren't too impressed with the officially reported 3.2% GDP growth. Instead of rushing in to bid up the U.S. dollar against foreign currencies, they showed little interest in buying Greenbacks.

The U.S. Dollar Index is trading slightly lower overall for the week. The massive spike in the Federal Reserve note's exchange rate seen earlier this year seems to be in a longer-term trend of reversing lower.

The U.S. government has leveraged the currency as a political weapon against Russia and other geopolitical foes. But hopes that cutting off Russia from the global financial system would bring it to its knees economically and force an end to the war in Ukraine appear to have been misplaced.

The war continues to drag on. And Russian President Vladimir Putin remains undeterred by economic sanctions and other forms of international pressure.

This week Ukrainian President Volodymyr Zelenksyy met with President Joe Biden and spoke before Congress to beg for billions more in aid. Although there is growing skepticism among the public about continuing to fund Ukraine's war effort, the Washington establishment seems intent on doubling down.

GOP Senate Leader Mitch McConnell said aid to Ukraine was the Republican party's number one priority. His priorities evidently don't include fiscal restraint or getting control over the ballooning national debt – which is set to become a lot more expensive to service in the coming years thanks to rising interest rates.

Deteriorating U.S. finances and escalating geopolitical tensions are driving many central banks around the world to divest from dollars to load up on gold. Central bank gold buying has surged dramatically this year – and not just by Russia, China, and other big players. Countries across Europe and the Middle East are also boosting their gold holdings.

Here's some of what top precious metals analysts including Lynette Zang are saying about these developments:

Lynette Zang: We've got global central banks that have now been accumulating more gold than they ever have historically, just through the third quarter of this year. What do they know? Well, first of all, gold is the primary currency metal. And when they do the overnight resets, this is what they reset it against.

Financial News Anchor: Central banks are stocking up on gold. You may remember JP Morgan himself once said, "Gold is money. Everything else is credit."

Economic Commentator #1: Yeah, they're loading up. Central banks are around the world are loading up on gold, the most gold that they've bought since 1967. You've got Qatar, you've got Turkey. I mean, you've got a number of central banks, some surprising ones, that are buying tonnage of gold.

Economic Commentator #2: They issue currency. They're basically saying, "You need to own gold as a hedge against what we're giving you." And when you realize, and even the Dutch Central Bank, a bar of gold always retains its value. Gold is the perfect piggy bank. It is the anchor of trust in the financial system.

The World Gold Council confirms that central bank gold buying in 2022 is running at its hottest pace in decades. On the flip side, though, individual investors and institutional traders have been pulling cash out of exchange-traded funds and other financial instruments tied to precious metals prices.

Speculative interest in gold and silver may not catch fire until there is more clarity about when the Fed will pause or perhaps reverse course on rate hikes. In the meantime, the supply and demand fundamentals for physical bullion are looking favorable heading into the New Year.

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