Gold set to surge as central banks boost holdings amid geopolitical risks, inflation

Gold price is expected to hit $2100 by end of 2023 with central banks continuing to boost gold reserves as dollar sanctions trigger a shift in long-term strategies on currency reserves amid “a colossal volume of $250 trillion unfunded liabilities” in the US, mounting geopolitical risks and inflation.

According to Swiss investment bank UBS, even after a record year of purchases, demand for the yellow metal will remain strong as the freezing of Russian currency reserves "may have led to a long-term impact on the behaviour of central banks.”

In 2022, central banks bought 1,078 metric tons, the highest annual demand for gold since record-keeping began in 1950 and more than double the 450 metric tons purchased in 2021, UBS strategists said in a recent report.

Elsewhere, analysts cited elevated geopolitical risks and inflation driving gold to $2,100 by the year's end and $2,200 by March 2024.

Gold is currently placed around $1,960 as the dollar struggles to capitalise on its modest gains registered over the past two days while coming under fresh selling pressure in the wake of expectations for an imminent pause in the Federal Reserve’s year-long policy tightening cycle.

At least 24 per cent of central banks are looking to raise gold holdings in 2023 amid rising geopolitical worries, interest rate concerns, and inflation pressures, according to a new survey from the World Gold Council.

Otavio Costa, portfolio manager at Crescat Capital, says gold as an asset stands to gain significantly and at the cost of US Treasury securities, following the finalising of the debt-ceiling agreement. For 30 years, US Treasury instruments had appreciated on the back of rising interest rates and globalisation, and buying by pension and endowment funds. This high demand for Treasuries resulted in decreased interest rates and led to inflation of equity-market valuations. Costa now sees global banks becoming more partial to gold for their forex reserves, and said if the banks increase the share of gold holdings in their balance sheet to the historical average of 40 per cent, then the yellow metal’s price could appreciate by 25 per cent to $2,500 an ounce.

Robert Kiyosaki, the author of ‘Rich Dad Poor Dad,’ has declared the US government bankrupt due to trillions of dollars in unfunded liabilities, and advised his 2.4 million Twitter followers to invest in gold, silver, or Bitcoin as protection against the looming economic crisis.

Highlighting the impending recession, Kiyosaki asserts that gold, silver, and Bitcoin serve as the best safeguards. In April, he predicted that Bitcoin could ultimately rise to $100,000 or even more.

Central banks are on pace to buy 700 metric tons this year, UBS estimated, down from 2022 but still above the average of 500 metric tons since 2010.

"We think this trend of central bank buying is likely to continue amid heightened geopolitical risks and elevated inflation," UBS said. "In fact, the US decision to freeze Russian foreign exchange reserves in the aftermath of the war in Ukraine may have led to a long-term impact on the behavior of central banks."

The US dollar traditionally has been a mainstay of central bank reserves. But the recent surge in demand for gold has been seen as a sign of de-dollarisation after the greenback was used to put financial pressure on Russia for its war on Ukraine.

Among the top central banks buying gold are those in countries that are seeking to displace the dollar's dominance in global finance or trying to get around Western currency sanctions, namely China, Russia, and India.

This sustained high demand from central banks is one of the reasons UBS thinks gold will climb to $2,100 per ounce by year-end and $2,200 by March 2024.

Another factor that will help gold rally is the weakness in the dollar. According to UBS, the dollar is set to decline further as the Federal Reserve looks ready to pause its tightening cycle while other central banks continue to raise their rates.

"Gold has historically performed well when the US dollar softens due to their strong negative correlation, and we see another round of dollar weakness over the next 6-12 months," the note said.

A third factor in favour of gold is rising US recession risks, with UBS noting deterioration in GDP, construction, manufacturing, and consumer sentiment. Tighter credit conditions will also likely weigh on economic growth and corporate earnings, analysts added.

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