The Surge of Gold: Central Bank Buying and Market Dynamics Under Biden

In recent years, the gold market has witnessed a remarkable transformation, driven by a confluence of factors that have reshaped investor sentiment and demand. Central bank gold buying has accelerated under President Biden, and this trend, combined with robust physical gold purchases in Asia, has emerged as a primary catalyst for the rising gold prices. This surge has occurred despite a strong U.S. dollar and elevated U.S. Treasury yields, both of which have been influenced by the Federal Reserve’s aggressive interest rate hikes aimed at curbing inflation.

The Federal Reserve’s Interest Rate Cuts

On September 18, 2024, the Federal Reserve announced its first interest rate cut since the onset of the pandemic, signaling a shift in monetary policy. Following this announcement, the federal funds rate dropped by 100 basis points, leading to a corresponding decline in bond yields. The benchmark U.S. 10-year Treasury yield, which had reached a five-year high of 4.92% on October 22, 2023, fell to 4.24%. This loosening of monetary policy has had a direct impact on precious metals, with both gold and silver benefiting from the favorable environment.

In 2024, spot gold prices surged by an impressive 32%, while spot silver saw a more modest increase of 11%. The combination of lower interest rates and a weakening dollar has made gold an attractive investment, particularly as a hedge against inflation and economic uncertainty.

Gold’s Record Highs Amid Trade Tensions

Gold prices received an additional boost from geopolitical tensions, particularly the trade war threats posed by President-elect Trump. On January 30, 2025, spot gold reached a new record high of $2,798.50 during trading, with gold futures even surpassing this figure at $2,846.20 per ounce. The anticipation of 25% tariffs on imports from Canada and Mexico, along with fresh economic data that weakened the dollar, contributed to this bullish sentiment. Historically, gold and the U.S. dollar have moved in opposite directions, and this trend continued as investors sought safe-haven assets amid uncertainty.

As the implementation date for tariffs approached, gold prices continued to climb. On January 31, 2025, bullion topped $2,800 for the first time, driven by haven demand as fears of trade wars intensified. Analysts noted that the potential for tariffs to erode U.S. finances and reignite inflation further fueled gold’s appeal as a store of value.

Central Bank Buying: A Key Driver

Central bank buying has emerged as a significant factor in gold’s price appreciation. In 2024, central banks purchased over 1,000 tons of gold for the third consecutive year, with the National Bank of Poland leading the way by adding 90 tons to its reserves. This trend reflects a broader strategy among central banks to diversify their reserves away from the U.S. dollar, particularly in light of geopolitical tensions and economic uncertainties.

According to the World Gold Council, global gold demand, including over-the-counter trading, rose by 1% to a record 4,984.5 tons in 2024. Excluding OTC trading, total gold demand reached 4,553.7 tons, the highest level since 2022. Investment demand for gold bars increased by 10%, while coin buying saw a decline of 31%. The acceleration in central bank purchases, particularly in the fourth quarter of 2024, where buying surged by 54% year-on-year, underscores the growing recognition of gold as a safe-haven asset.

The Impact of Tariffs on Gold Supply

The threat of tariffs has not only influenced gold prices but has also created a supply crunch in the market. Traders, fearing potential tariffs on gold, have moved billions of dollars’ worth of gold from the Bank of England to New York. Delivery times from the Bank of England have increased from a few days to 4-8 weeks, leading to a shortage of deliverable gold in London. This logistical challenge has diminished liquidity in the London market, prompting significant deliveries of gold bullion in New York.

The dynamics of the gold market have shifted, with COMEX gold futures trading at a premium to spot prices in London. This disparity has incentivized traders to fly silver into the U.S., a move that is unusual given the costs associated with airfreighting the metal. The situation has raised concerns about the potential for a breakdown in the "paper" gold market, where investors trade contracts without taking physical possession of the metal.

The Role of Russian Gold Purchases

While China and India have traditionally dominated gold consumption, recent developments indicate a significant shift in Russia’s gold-buying behavior. Amid sanctions and economic uncertainty, Russian consumers purchased a record amount of gold in 2024, acquiring 75.6 metric tons of bullion, coins, and jewelry. This surge in demand reflects a broader trend of individuals seeking to protect their savings in the face of currency fluctuations and geopolitical tensions.

Interestingly, despite being one of the largest gold buyers, Russia’s central bank has not resumed significant purchases. Instead, retail demand has surged as citizens seek alternative ways to secure their wealth. The Kremlin’s decision to cancel value-added tax on retail gold purchases further incentivized this trend.

The Future of Gold and Silver

Looking ahead, the outlook for gold remains bullish, with projections suggesting that prices could continue to rise. Analysts believe that central banks will maintain their gold-buying momentum, driven by growing government debt burdens and geopolitical uncertainties. The World Gold Council’s Joseph Cavatoni indicated that central banks could repeat their 1,000-ton-plus net buying in 2025, further supporting gold prices.

Silver, too, is expected to benefit from the dynamics in the gold market. With a gold-silver ratio currently at 88.5, silver appears undervalued relative to gold. Historical trends suggest that when the ratio is this high, silver tends to outperform gold in the following months. As industrial demand for silver continues to grow, particularly in sectors like solar power and electronics, the metal’s price could see significant upward momentum.

Conclusion

The interplay of central bank buying, geopolitical tensions, and evolving market dynamics has created a fertile environment for gold and silver prices to rise. As investors seek refuge from economic uncertainty, both metals are poised to play a crucial role in wealth preservation. The potential for further price appreciation, coupled with the ongoing demand from central banks and retail investors, suggests that now may be an opportune time to consider adding physical gold and silver to investment portfolios. In a world characterized by volatility and unpredictability, these precious metals offer a beacon of stability and value.