Central Bank Gold Purchases: The End of an Era?

Since the situation in Iran deteriorated, the gold market has experienced sharp volatility. In March, gold prices briefly fell by 16%, and as Turkey began selling gold, it sparked intense concerns in the market about whether the “central bank gold-buying trend” is reversing.

According to the Chasing the Wind Trading Desk, a UBS latest research report clearly points out that **the structural trend of official-sector gold purchases has not changed; central banks are still net buyers of gold. Although high volatility in the short term has led strategic buyers to temporarily stand aside, strong demand in the China market provides solid support for gold prices. **

UBS believes that the current market pullback is an excellent opportunity for investors to build strategic gold positions. As concerns about the “low growth + high inflation” combination and heightened geopolitical tensions intensify, the medium- and long-term upward trend for gold is strengthening. UBS expects the average annual gold price to reach $5,000 this year and will maintain its year-end target price of $5,600.

From buyers to sellers? Panic about central bank selloffs has been greatly exaggerated

The most important question for participants in the gold market is: Are central banks selling gold? In particular, if conflicts in the Middle East may become prolonged, the market worries that central banks will have to sell gold reserves to deal with soaring inflation, slowing economic growth, and currency depreciation. This concern is widely viewed as the main reason behind the 16% drop in gold prices in March.

However, UBS believes that the likelihood of a structural shift in the official sector is extremely low.

UBS expects that central banks’ gold purchases will only gradually slow; this year’s purchase volume is expected to be between 800 and 850 tons, slightly lower than the roughly 860 tons in 2025. During the past fifteen years of accumulating gold reserves, it is normal for some central banks to sell in a given month. This could be tactical profit-taking at highly attractive entry levels, or it could be due to portfolio rebalancing triggered by a rise in gold prices.

The truth behind Turkey selling 50 tons of gold

In recent news, it has been reported that the Central Bank of the Republic of Turkey (CBRT) sold about 50 tons of gold over several weeks, drawing significant attention from the market. But UBS strongly warns investors not to take these headlines at face value.

Turkey is unique in how it uses gold as a policy tool. Since Turkey introduced the reserve option mechanism (ROM) in 2011, some of the total gold holdings reported by the Turkish central bank actually represent positions of domestic commercial banks. In addition, part of the reported selling appears to be swap transactions rather than direct selloffs.

UBS notes that there is currently a lag in the data available that can break down changes in Turkey’s total gold holdings, and the market needs to wait for more detailed data to see the real trend.

Strategic buyers temporarily stand by; demand from China supports the floor

Since 2022, purchases by central banks and official institutions have been an important support for the gold bull market. However, recent market flow data shows that the official sector and long-term strategic investors have chosen to stand aside amid the recent price pullback.

The early-March extreme uncertainty triggered by the Middle East conflict, along with a sharp rise in U.S. real interest rates and a strengthening dollar, put heavy pressure on gold prices, leading to a washout of long positions and selloffs by shorts.

However, ongoing healthy demand from China (domestic prices remain at a premium) helps limit downside room, allowing the market to stabilize around $4,500. As expectations for Fed rate hikes reverse, gold prices are gradually rebounding toward $4,700.

Central bank cards revealed: Buying and holding is still the absolute mainstream

To address investors’ questions about how central banks manage gold reserves, UBS cites the World Bank’s “2025 Fifth Biennial Survey of Reserve Management” released at the end of last year (covering 136 institutions).

The data reveals the real logic behind central banks’ gold management:

2. Lack of quantitative decision basis: Most central banks decide their level of gold holdings based on “historical legacy considerations” (about 47%) and “qualitative assessments” (about 26%), rather than quantitative portfolio optimization models. Only about a quarter of central banks include gold in a formal strategic asset allocation framework.

3. Very limited short-term trading: In terms of investment style, as many as about 62% of central banks adopt a “buy and hold” strategy. Most importantly, only about 4.5% of central banks say they will make short-term tactical adjustments to gold reserves.

4. The core driver of increasing holdings: Among the central banks that reported changes in gold reserves in 2024, more than half said “diversification” is the strongest driver for increasing holdings. Other major reasons include local gold purchase plans (about 35%) and geopolitical risk (about 32%). Only about 6% of central banks said liquidity needs are the reason for changing positions.

A pullback is a good opportunity to build strategic positions

Although in the coming weeks gold prices may face more consolidation and volatility as the market continuously re-evaluates geopolitical risks, UBS remains convinced that gold’s long-term fundamentals are still strong.

Speculative positions are already fairly clean, while long-term market participants remain in a state of underinvestment.

UBS emphasizes that price pullbacks are an opportunity to establish strategic gold positions. Due to the mark-to-market adjustment in the first quarter, UBS has fine-tuned its forecast for this year’s average annual gold price from the previous $5,200 to $5,000, but firmly maintains its year-end target price of $5,600 set at the end of January.

The above excellent content is from the Chasing the Wind Trading Desk.

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