Generalist investors continue to shun the gold market to focus on record equity prices, but there is still one sector that is interested in the precious metal.
Central bank demand remains an essential factor for the gold market and their appetite is not close to being sated anytime soon, according to some analysts.
Speculation is growing that India's central bank will add to its gold reserves this year. In a recent report, Howie Lee, an economist at Oversea-Chinese Banking Corp. said that he estimates that the Reserve Bank of India (RBI) could purchase 46.7 tonnes of gold in 2019, or about 1.5 million ounces.
His comments come as India sees its gold reserves grow to record levels. According to data from the International Monetary Fund, so far this year India's central bank bought 8.2 tonnes of gold, this comes after the RBI added a total of 42.3 tonnes of gold in 2018. The RBI currently holds 608.7 tonnes of gold, representing less than 7% of its official foreign exchange reserves.
India is joining the ranks of China and Russia, which have been significant buyers of gold so far this year. Analysts say that official gold demand is increasing as countries attempt to diversify their reserves away from the U.S. dollar. The latest data from the IMF shows that China bought 21.8 tonnes of gold; meanwhile, Russia has bought 37.4 tonnes of gold.
"There seems to be some form of pattern, not just the RBI, that central banks tend to increase gold reserves when the global macroeconomic environment is uncertain," OCBC's Lee said. "It's no coincidence that one of the biggest buyers of gold in recent months was China, which is in the midst of trade tensions with the U.S. and may have been seeking to diversify its trillions of dollar reserves."
Daniel Ghali, commodity strategist at TD Securities, said that central bank gold demand has provided valuable support in the gold market. Currently, the gold market is trying to bounce off its recent four-month low. June gold futures last traded at $1,278.30 an ounce, up 0.40% on the day.
Ghali explained that portfolio managers have a little bit more confidence in the gold market when they see growing demand from central banks.
He added that investors shouldn't expect to see an end to central bank buying anytime soon.
"These themes in the gold market play out over months and years," he said. "Last year we saw central bank's buy gold at the fastest pace since the 1970s. I think that is an indication that their appetite is only starting to grow."