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Gold has been on a tear over the past 21 months, rising 42% to $2,333 an ounce on June 24. It reached a record high of $2,425 on May 20.
Perhaps the biggest catalyst for the rally is central bank buying. As the world becomes a multipolar system and the importance of trade declines, central banks want to diversify their economies away from the dollar, so they sell some of their dollars to buy gold.
In 2023, central banks bought 1,037 metric tons of gold, the second-highest annual purchase on record, after 1,082 tons in 2022, according to the World Gold Council.
29% of central banks expect to enhance their gold reserves in the next 12 months, according to a survey conducted by the Council in the period from February to April. This is the highest number since the council began the survey in 2018.
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The expectation of lower interest rates is also boosting gold. Low prices make fixed income investments less attractive than gold because gold does not eliminate income. Interest rate futures point to a rate cut by the Federal Reserve by September.
It is not certain that gold will rise further. Inflation has declined recently, and gold often moves inversely with inflation, acting as a hedge against rising prices. So, low 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 more than three years.
Gold also often moves inversely against the dollar, where it can act as a hedge against a falling dollar. However, the dollar has strengthened recently, with the Bloomberg Dollar Spot Index up 4.2% year to date. This could be a negative factor for gold.
Bank of America sets new gold price target
Michael Widmer, commodities strategist at Bank of America, is conditionally bullish on the precious metal.
“Gold could reach $3,000 in the next 12 to 18 months [up 29% from June 24]“Although flows do not justify this price level at the moment,” he wrote in a comment.
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“Achieving this will require non-trade demand to rise from current levels, which in turn requires a lower Fed rate.”
Widmer said the influx of investment money into exchange-traded funds backed by physical gold and a rebound in clearing volumes from the London Bullion Market Association (LBMA) would be an “encouraging first sign” for gold.
Investing in physical ETFs indicates that retail investors are interested in gold, because that is how they often invest in the metal.
The London Bullion Market Association is a major market for wholesale physical gold. So, strong trading volume there could mean huge demand for gold.
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“Continued central bank purchases are also important, and pressure to reduce the share of the dollar in foreign exchange portfolios is likely to increase central bank gold purchases,” Widmer said.
Other upside factors: Treasuries risk
Meanwhile, “non-commercial purchases rose by about 3% in the first quarter of 2024, enough to justify an average gold price of $2,200 per ounce,” Widmer said. “But if they rise further, gold could reach $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 are: “its long-term store of value/inflation hedge, performance during times of crises, effective portfolio diversification and lack of default risk,” Widmer said.
More economic analysis:
- The record rally for stocks may be in vapors
- Consumers are taking advantage amid sticky inflation and a slowing labor market
- Fed rate cut timing changes after retail sales data
In addition, he said that “concerns about the dollar’s dominance in the global economy and the health of the US currency” could be positive for gold. “This would stimulate further central bank gold purchases and may also attract interest from private investors.”
He said there was a slight risk that the turmoil facing the dollar would jeopardize the Treasury market, which for decades has been the main safe haven for global investors.
“The US Treasury market is one shock away from stopping running smoothly,” Widmer said. “Under this scenario, gold may initially fall due to widespread liquidations, but should then rise.”
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