Weak dollar, China's recovery to drive gold towards $3,000
Investors rely on safe-haven investment opportunities to shield themselves from market volatility
Gold is expected to shine over the next year-and-a-half on the back of expected weakness in the US due to the central bank's expansionary monetary policy, strong investor demand for the yellow metal and good recovery in the Chinese economy spurring demand, say analysts.
Francisco Blanch, commodity and derivative strategist at Bank of America Merrill Lynch, sees the metal hitting $3,000 in the next 18 months as investor demand has gone up from about 25 per cent to about 45 per cent in the second quarter.
According to Blanch, the Covid-19 crisis was leading to such a large increase in central bank balance sheets; a large expansion of monetary policy, coupled with an enormous fiscal expansion that the value of currencies, not just the dollar, would be hit pretty meaningfully.
A weakness in the US dollar drives investors towards safe-haven investment opportunities such as gold to shield themselves from market volatility.
"Investors have geared their portfolios partially believing the unprecedented fiscal and monetary expansion would lead to a large surge in investor gold buying, with ETF inflows at record levels in recent weeks," he added.
The yellow metal's price has increased around 2.7 per cent in the past 30 days, 15.9 per cent in the last six months and 29.4 per cent in the past year. Gold touched an all-time high of $2,089 in early August.
Frank Holmes, CEO of US Global Investors, earlier this month had predicted that the gold will hit $4,000 an ounce forecast by the end of this bull cycle.
Gold has seen a big shift on the demand side but to a large extent the rally has been ETF-driven. "We see that continue over the course of the next six to 12 months with eventually central banks coming in, with potentially more investors coming in, and with allocations increasing," added Blanch.
Another factor that will help gold rally over the next few months, according to the BofAML analyst, is a quick recovery in China's GDP, converging to US levels.
"So I think this situation is likely to lead to more gold demand down the road. Now I don't think the US will lose its currency reserve status anytime soon. But I think it's important to understand the fact that China is rising geopolitically as well as economically at a faster rate today because the US is taking a bigger hit from Covid-19 than China. The pandemic could continue to accelerate this transition," he added.
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