The Gold Rush Inside: How Central Banks Are Driving Prices to New Heights

A former ECB central banker, shared some insights with me about nine weeks ago regarding why gold prices are skyrocketing. Sure, everyone knows it’s due to unstoppable demand from central banks—but I wasn’t content with just the surface-level explanation. I dug deeper to unravel the internal mechanics, the behind-the-scenes action driving this golden surge. Here’s what I got as answer.

The Driving Force: Central Bank Hunger for Gold

Since 2022, emerging market central banks—think heavyweights like China, India, and Poland—have been snapping up gold at an impressive clip. Their goal? To diversify away from USD-dominated assets, shield their economies from geopolitical turmoil, and counter inflation or sanctions that could cripple their reserves. This isn’t just a trend; it’s a strategic shift, and the demand doesn’t flinch at price tags. With the ability to print money, these institutions treat gold as a must-have asset, creating a bedrock for the market that’s hard to shake.

If a central bank governor declares a target like boosting gold reserves by 20% in a year, the machinery kicks into gear. Teams make quiet calls to dealers, refiners, and even other central banks worldwide to secure the metal. The cost? Secondary—they can just fire up the printing presses. This price-insensitive buying is what keeps the gold market humming, even when prices hit record highs.

Who’s Selling, and How Does It Work?

But who’s on the other side of these trades? Who’s letting go of their gold? The sellers are a mixed bag, and the process is interesting.

• Sometimes it’s other central banks adjusting their portfolios. Take Turkey, for instance—they’ve been offloading gold for years to prop up their struggling lira amid inflation and currency crises. Nations with surplus holdings, like Switzerland or the U.S. (though the latter rarely sells), might also trade bilaterally with buyers like China or India. These deals are often private, vault-to-vault swaps, negotiated through trusted intermediaries to avoid rocking the market with public sales.

• Then there’s the London Bullion Market Association (LBMA), the global epicenter of physical gold trading, handling over $1 trillion in annual turnover. This is where the real volume moves—newly mined gold, recycled scrap from old phones, chips, jewelry, and industrial leftovers all find their way into the system. The LBMA connects miners, recyclers, and specialized traders, using its "Good Delivery" standards (99.5% purity, 400 oz bars) to keep supply flowing.

But here’s the catch: with mining output tight and recycling volumes variable, any surge in demand could spark even bigger price jumps.

• Smaller players—individuals, hedge funds, or ETFs—might sell via exchanges like COMEX or through LBMA members, but central banks avoid these public markets to prevent price spikes. The seller ecosystem ensures a steady supply, but central bank demand often outpaces it, especially during geopolitical unrest, tightening the market and pushing prices higher. Those gold transports, moving tons of metal across continents, are the unsung heroes (or culprits) in this equation.

  
  

Diving Deeper: The LBMA’s Role in the Gold Game

Let’s zoom in on the LBMA. Established in 1987 under the Bank of England’s oversight, it’s the gold trading gold standard. Its "Good Delivery List" includes around 70 refiners worldwide—names like Switzerland’s PAMP or UAE’s Emirates Gold—ensuring quality and traceability.

Every day, the LBMA’s AM/PM price fixes, run via ICE Benchmark Administration’s electronic platform, reflect real-time supply and demand. Banks, traders, and miners submit buy/sell orders, and prices settle in USD per ounce. It’s a global pulse check on gold.

The LBMA also runs a Responsible Sourcing Programme, aligned with OECD guidelines, to keep gold conflict-free and AML-compliant. This matters to central banks wary of tainted supply chains. Its over-the-counter (OTC) market dominates, with ~90% of global trades happening off-exchanges—perfect for those large, opaque transactions central banks love. London’s vaults hold ~7,000 tons of gold, over 25% of the world’s above-ground stocks, making it a logistical powerhouse. But that gold doesn’t just sit there—transports shuttle it to and from these vaults, often internationally, with firms like Brinks handling security and logistics. Delays or disruptions in these movements can tighten supply further.

The Bigger Picture: ATHs Ahead, But a Downtrend Looms

This coordinated central bank buying, supported by a global transport network, creates a solid price floor. As long as trends hold—fueled by US-China rivalry, global risks, and loose monetary policy—we could see new all-time highs, one peak after another. With spot gold already at record levels, the bullish case feels strong.

But here’s the big question I have in my mind: when and where does this rally end? My guess is a potential 4-5 year downtrend, reminiscent of 2008-2013, if supply suddenly floods the market. Imagine a scenario where the U.S. or IMF decides to offload significant reserves—that could flip the script overnight. For now, the LBMA’s role amplifies this buying surge, with buyers like China (~2,000 tons, 3% of reserves) and India ramping up.

Yet, supply constraints—mining output flat at ~3,000 tons/year, recycling unpredictable—could drive prices even higher if demand keeps climbing.

My personal view

I’m a bit surprised by how straightforward this gold market mechanism is—and yet how massive its impact turns out to be. Honestly, I’m not a huge fan of this market. I don’t like being at the mercy of forces I can’t control, like central bank buying sprees that dictate prices.

However here’s the silver lining: with daily/ weekly swings of $50 or more, there’s still a chance to pocket some cash if I manage my risk well. It’s a huge contrast to the chaos of 2018, 2019, or even 2021, when CFD brokers would trigger spikes just to hit stop-losses, while the real market price lagged far behind. That was pure manipulation. Now, with these high movements, those tricks are harder to pull off.

For anyone who loves trading and has burned a fortune on XAU in the past, it’s time to take a closer look—this could be a game-changer.

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