Gold stocks smashed: Is this the top for gold prices?

Gold prices experienced its largest selloff in three-and-a-half years on Friday, down 3.5% to US$2,290 an ounce after reports indicating that China's central bank halted all gold purchases in May.

The People's Bank of China had previously topped up its gold reserves for 18 straight months, although the pace of buying slowed in April, down to 60,000 troy ounces from 160,000 in March and 390,000 ounces in February. The flurry of gold purchases reflects the central bank's plans to diversify its reserves and guard against rising geopolitical tensions.

Source: ING Economics

The World Gold Council's first-quarter Gold Demand Trends report reveals that gold demand was up 3% year-on-year to 1,238 tonnes, marking the strongest first quarter since 2016. But the PBOC's pauses raises concerns that gold prices have peaked and demand is set to cool.

Additionally, last Friday's stronger-than-expected US non-farm payrolls report drove up bond yields and the US dollar, placing further pressure on gold prices.

A sea of red for ASX gold stocks

Most mid-to-large cap gold stocks are down around 5% on Monday. Although the average one year performance for the below list of gold stocks is still firmly in the positive, up 29.3%.

Data as at 12:20 pm AEST on Monday, 11 June 2024

Where to from here?

There are many opinions on where prices will go. Here are a few of the most interesting ones I've gathered:

• "They are just waiting and watching. If prices correct to the US$2,200 per ounce level, they will resume [purchasing gold] again," David Tait, CEO of the World Gold Council (WGC), told Reuters

• "Central banks are buying gold and China is the main buyer. Sentiment on gold is bullish because of geopolitical tensions and elections. China is expected to buy more," KL Yap, chairman of the Singapore Bullion Market Association, said.

• A survey conducted by the Official Monetary and Financial Institutions Forum showed that central banks planned to continue to increase their exposure to gold in the next 12-24 months.

• "We expect gold prices to come down slightly from their current levels this quarter as the Fed continues its cautious approach, and with geopolitics already being factored into the current price. We see prices averaging US$2,300 in the second quarter ... we see prices peaking in the fourth quarter, averaging $2,350," ING analysts wrote in a report

Gold ETF flows turn positive

Global gold ETFs saw inflows in May, ending a year-long streak of outflows, according to the World Gold Council, with inflows from Europe and Asia offset a small outflow from North America. Some of the key takeaways from the report include:

• North America registered its smallest outflow since December 2019, hawkish Fedspeak and rallying equity markets diverted investor attention away from gold

• Europe snapped a twelve-month streak of outflows, driven by expectations that the ECB would cut rates in early June

• Asia logged its 15th straight month of inflows. Although this marked the region's smallest inflow since 2023. China drove more than half the regions inflows, reflecting rising gold prices and continued yuan weakness

All things considered – China's central bank stopped buying gold in May, sparking concerns that the top is in for bullion demand and prices. Additionally, a hawkish Federal Reserve and rising Treasury yields are placing downward pressure on gold prices. However, global central banks are still accumulating gold at a significant pace and global ETFs are beginning to see inflows. Themes such as macroeconomic uncertainty and geopolitical risks also remain relevant. Despite the supportive backdrop, the market is likely to stay focused on the news from China.