Central banks’ robust buying to propel gold to $3,000

Investors are boosting gold holdings amid uncertainty over election outcomes


Issac John

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Published: Mon 8 Apr 2024, 9:46 PM

Last updated: Mon 8 Apr 2024, 9:47 PM

Gold prices witnessed a sudden $27 upswing and stormed through the $2,350 barrier to refresh an all-time high at $2,354 in Asian trading on Monday as some precious metal analysts said the momentum could carry the yellow metal to $3,000 before the next business cycle shift — a 30 per cent increase from current levels.

Despite easing geopolitical tensions between Israel and Hamas and reducing bets of a June US Federal Reserve interest rate cut, gold has been extending its record-setting rally primarily on reports of potential robust gold purchases by global central banks.

Predicting the rally to continue apace, precious metal experts in Dubai said while investors have been riding high on a record-breaking stock market, gold sustained its favorite safe haven, reaching new peaks. “As a store of value and medium of exchange, besides its shine and usage for jewellery, the precious metal is widely seen as a safe-haven asset, in particular a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.”

Economist David Rosenberg, the president of Rosenberg Research, said in a recent note that the latest gold run is "especially impressive," because it not only surpassed bitcoin and every major currency, but also overcame typical macro headwinds that often depress its value.

"The rise in the gold price has come at a time of dollar strength, falling inflation expectations, and during which the Fed has moved market expectations toward a 'higher for longer' conviction. All those developments would typically hurt the gold price, but it's forged ahead regardless," his team wrote in the note.

Rosenberg analysts anticipate another 15 per cent upside with a potential 30 per cent in play as central banks begin to cut rates. Analysts at Rosenberg cited the precious metal's historically negative correlation with gold prices.

They laid out two scenarios, both at which arrive at the conclusion that gold has further to rise: a "soft landing" and a typical bear market.

In a "soft landing" scenario, assuming global real interest rates return to their pre-2000 averages—higher than the post-GFC stagnation era — this would lead the dollar to drop by approximately 12 per cent and push up gold prices by about 10 per cent.

However, if a recession hits the economy — with global real interest rates reverting to their 2014-2024 average, stock markets stabilising, and the dollar depreciating by around 8.0 per cent—the upside for gold is more like 15 per cent, putting it in the $2,500 range.

Analysts said with the US debt-to-GDP ratio hitting 120 per cent and servicing costs escalating — investors are boosting gold holdings amid uncertainty over election outcomes and the looming possibility of a fiscal crisis. They said it is more likely that gold reaches $3,000 per ounce than falls back to $1,500 as rising geopolitical tensions would further drive prices higher.

"The read-through for investors is straightforward: make sure you have gold in your portfolio, and overweight it. The downside risks are well contained (though a very near-term correction is not impossible and should be looked through), but the upside is tantalizing," Rosenberg analysts said in their note.

They said the major driver of the latest highs wasn't so much on the supply side — which has been steady in recent years — but rather on the demand side, thanks to central banks' re-embrace of it as a reserve asset.

With the Chinese Yuan losing its grip as the world's second reserve currency, and as nations like Japan, Russia, Turkey, and Poland fear over reliance on dollars, many have turned to gold for security as they weathered idiosyncratic economic risks.

The People’s Bank of China (PBOC) purchased gold for its reserves for the 17th straight month in March. Bullion held by the Chinese central bank rose to 72.74 million fine troy ounces last month.

The Reserve Bank of India also stood out with its continued accumulation of gold reserves. Weekly data from the RBI revealed a six-tonne increase in gold holdings in February alone. This brings the total year-to-date buying by the RBI to over 13 tonnes, with total gold reserves now reaching 817 tonnes. India's consistent efforts to bolster its gold reserves reflect a strategy aimed at diversifying its foreign exchange reserves and mitigating risks associated with currency fluctuations and economic uncertainties.

Markets are expecting more robust gold purchases by global central banks later this year, therefore, advancing their purchases and ramping up price to a new record high. Gold demand from central banks totaled 1,037.4 metric tons in 2023, just below the record high set in 2022 at 1,081.9 metric tons, according to the World Gold Council.

The WGC report showed that global central banks' purchases of gold rose by 19 metric tons in February, up for a ninth consecutive month.

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