Gold has been on a tear over the last 21 months, soaring 42% to $2,333 an ounce on June 24. It hit a record high of $2,425 on May 20.
Perhaps the biggest catalyst for the surge is central bank buying. With the world turning multi-polar and trade becoming less important, central banks want to diversify away from dollars, so they are selling some of their dollars to buy gold.
In 2023, central banks purchased 1,037 metric tons of gold, the second highest annual purchase ever, after 1,082 tonnes in 2022, according to the World Gold Council.
And 29% of central banks expect to boost their gold reserves in the next 12 months, according to a survey the Council conducted from February to April. That’s the biggest figure since the Council began the survey in 2018.
Central bank purchases have helped push gold to a record high this year.
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Anticipation of falling interest rates is also boosting gold. Sliding rates make fixed-income investments less attractive than gold because gold doesn’t throw off income. Interest-rate futures point to a Federal Reserve rate cut by September.
It’s no slam dunk that gold will rise further. Inflation has been slipping recently, and gold often moves inversely to inflation, acting as a hedge against price rises. So, falling inflation is often bad for gold.
Consumer prices, excluding food and energy, rose 3.4% in the 12 months through May, the lowest reading in over three years.
Gold also often moves inversely against the dollar, as it can act as a hedge for a declining greenback. However, the dollar has strengthened recently, with the Bloomberg Dollar Spot Index gaining 4.2% year to date. That could be a negative factor for gold.
Bank of America sets new gold price target
Michael Widmer, a commodity strategist at Bank of America is conditionally bullish on the precious metal.
“Gold can hit $3,000 over the next 12-18 months [up 29% from June 24], although flows do not justify that price level right now,” he wrote in a commentary.
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“Achieving this would require non-commercial demand to pick up from current levels, which in turn needs a Fed rate cut.”
An inflow of investment money into exchange-traded funds backed by physical gold and a pick-up in London Bullion Market Association (LBMA) clearing volumes would be an “encouraging first signal” for gold, Widmer said.
Investment into physical ETFs would indicate retail investors are interested in gold, as that’s how they often invest in the metal.
The LBMA is the main market for wholesale physical gold. So, a strong volume there could mean heavy demand for gold.
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“Ongoing central bank purchases are also important, and a push to reduce the share of dollars in foreign exchange portfolios will likely prompt more central bank gold buying,” Widmer said.
Other bullish factors, Treasuries risk
Meanwhile, “non-commercial purchases were up by around 3% in the first quarter of 2024, enough to justify an average gold price of $2,200 per ounce,” Widmer said. “But if they pick up further, gold could hit $3,000.”
The commercial market for gold includes jewelry and electronics. The non-commercial market includes central banks and investors.
Other bullish factors for gold: “its long-term store of value/inflation hedge, performance during times of crisis, effective portfolio diversifier and no default risk,” Widmer said.
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In addition, “concern over the dollar’s dominance in the global economy and the health of the U.S. currency” could be positive for gold, he said. “This should prompt more central bank gold buying and may also attract private investor interest.”
He said there’s a small risk that trouble for the dollar could endanger the Treasury market, which for decades has been the principal safe haven for global investors.
“The U.S. Treasury market is one shock away from ceasing to function seamlessly,” Widmer said. “Under this scenario, gold may fall initially on broad liquidations but should then gain.”
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