(Kitco News) - Robust physical demand for platinum and silver has highlighted the fragility of global supply chains. While the gold market has not seen the same kind of disruption, it may not be immune to similar volatility, according to one investment bank.
In their latest report, commodity analysts at Société Générale said they are closely watching official-sector gold demand, as they believe ongoing central bank purchases could lead to another short squeeze similar to what was seen in silver and platinum.
Global central banks have increased their gold reserves by roughly 1,000 tonnes in each of the last three years. Although demand is expected to be slightly weaker this year, the World Gold Council forecasts that holdings could still rise by as much as 950 tonnes, well above long-term averages.
Société Générale is issuing early warning signals that this demand for physical metal could put additional stress on a market dominated by paper holdings. The analysts said that even a 1% shift in reserve assets would spark a “gold frenzy.”
They added that China will continue to dominate the gold market.
“If instead of our previous assumption of central banks selling US assets and diverting a small proportion into gold, we could, alternatively, assume that central banks reallocate an additional 1% of their total reserves into gold and do not sell foreign assets,” they said. “China alone would require 276t alone but if we sum across all countries represented, we arrive at a very significant 762t of total flows. If we take that 762t and spread it over a three-year horizon, this will equate to 64t a quarter, almost the same level as under the assumption that foreign holders reduce their exposure to US assets, that is central to our gold forecasting model.”
SocGen’s latest comments come as official-sector gold demand continues to attract significant market attention. Analysts note that global central bank gold purchases have helped create substantial value in the gold market, establishing new support levels at each major breakout.
Analysts expect that growing economic and geopolitical uncertainty will continue to prompt central banks to diversify their holdings into gold. At the same time, America’s ongoing trade war has pushed many nations to reduce their reliance on the U.S. dollar and move into an asset with no third-party or geopolitical risk.
Although central bank demand remains robust, the World Gold Council notes that 66% of official purchases in the third quarter have gone unreported. Because central bank demand is often opaque, analysts must estimate buying using a range of data sources.
SocGen is monitoring central bank demand through U.K. trade data.
“Data released on 13 November, which includes September activity, pointed to an increase in export activity of 55.4 tonnes, which is 15 tonnes below the same month in 2023 and 70 tonnes below the seasonal norm. As prices declined in the latter half of October, this provided a better entry point for central bank buying, so we would expect export activity to have picked up (and a reduction in LBMA tonnage) last month. Seasonally, on average, there are 140 tonnes of exports out of the UK to all destinations in the month of October. We will have to wait until 12 December to see that data,” the analysts said.
SocGen has also seen a slight slowdown in U.K. gold exports to China.
“Total UK gold export data includes exports to China, and the HMRC dataset reports 15t of gold exports to China in September, up from 10t in August. However, September has seen an average of 47t of exports out of the UK into China (2022–2024). September’s export number is the lowest level going back to 2022. Seasonally, we would expect exports to reach 60t in October,” the analysts said.
While China imported 10 tonnes of gold from the U.K. in September, it reported only a 1-tonne increase in its official reserves.
According to the Financial Times, SocGen estimates—based on trade data—that China’s total purchases could reach as much as 250 tonnes this year, or more than one-third of total global central bank demand.
