How central banks are primed to drive a new ASX 200 gold stock rally

Global central banks could rekindle the bull run in ASX 200 gold stocks. But how?

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S&P/ASX 200 Index (ASX: XJO) gold stocks enjoyed a blistering rally from late February through to late May this year.

That rally was driven by a surge in the gold price.

On 28 February, the yellow metal was trading for US$2,030 per ounce. Amid fast-growing demand and relatively fixed short-term supplies, the gold price then went ballistic, hitting all-time highs of US$2,450 on 21 May.

As you'd expect, this came as good news for leading Aussie gold producers like Northern Star Resources Ltd (ASX: NST), Newmont Corp (ASX: NEM), Gold Road Resources Ltd (ASX: GOR), and Evolution Mining Ltd (ASX: EVN).

How good a news?

Well, from 28 February through to market close on 20 May, the S&P/ASX All Ordinaries Gold Index (ASX: XGD) – which also contains some smaller miners outside of ASX 200 gold stocks – rocketed 31%.

For some context, the ASX 200 gained around 3% over this same period.

Now with the gold price having since retraced to US$2,331 (still near historic highs), ASX 200 gold stocks have given back some of those outsized gains. Indeed, the ASX All Ords Gold Index is down 8% since 20 May.

But that trend could be about to reverse once more, with global central banks potentially supporting a new rally in the gold price.

Here's how.

ASX 200 gold stocks could get a boost from central banks

There are really two tailwinds that central banks could offer for ASX 200 gold stocks.

First, by cutting interest rates.

Gold, which pays no yield itself, tends to perform better in a low or falling interest rate environment.

Perhaps more importantly, central banks also buy a significant amount of bullion to hold in their vaults. The more they buy, the less there is for everyone else to acquire, which tends to drive prices higher.

Now the past two years have both seen central banks purchasing record amounts of the yellow metal.

And in what should be good news for investors in ASX 200 gold stocks, the World Gold Council's 2024 Central Banks Gold Reserves survey revealed that four in five respondents expect reserve managers will continue to increase their gold holdings in the next 12 months

The survey collected data from 70 global central banks. And it found that nearly 30% of central banks also plan to add to their own gold reserves within the next year.

The top three reasons to hold gold now, according to the surveyed reserve managers, are:

  • Gold's long-term value (88%)
  • Gold's performance during a crisis (82%)
  • Gold's role as an effective portfolio diversifier (76%)

Commenting on the survey results that could rekindle investor interest in ASX 200 gold stocks, Shaokai Fan, global head of central banks & head of Asia-Pacific, said, "Extraordinary market pressure, unprecedented economic uncertainty and political upheavals around the world have kept gold front of mind for central banks."

Fan added:

Many of these institutions have become more aware of the asset's value as a way to manage risks and diversify their portfolios.

What has been remarkable is that despite record demand from the official sector in the last two years coupled with climbing gold prices, many reserve managers still maintain their enthusiasm for gold.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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