Gold Prices Set To Potentially Climb On Fed Rate Cuts, Geopolitical Tensions, Bank of America Says

ZINGER KEY POINTS

• Bank of America’s Widmer suggests Federal Reserve rate cuts and central bank purchases could significantly boost gold’s appeal.

Gold prices could climb within the next 12 to 18 months, according to Bank of America’s latest analysis.

Michael Widmer, a commodity strategist at the bank, suggests that a combination of factors — increasing investment demand, geopolitical tensions, Federal Reserve rate cuts and central bank purchases — could boost the yellow metal’s appeal among investors.

Resurgence In Investor Demand

In 2023, investor demand for gold saw a notable resurgence, the investment bank noted, with private bar hoarding and central bank acquisitions accounting for 49% and 43% of purchases, respectively.

GLD, have experienced a decline in assets under management, which has tempered overall demand growth.

“A pick-up in LBMA clearing volumes would be an encouraging signal of rising non-commercial demand for gold, and would be consistent with higher prices needed to balance out the market,” Widmer said.

Chart: Bank of America Eyes A Near 30% Rally In Gold Prices Within 12-18 Months

Central Bank Purchases As A Key Driver

Central bank purchases remain a crucial factor supporting gold prices.

The World Gold Council’s (WGC) latest Central Bank Survey indicates a continued appetite for gold among monetary authorities. In 2023, central banks added 1,037 tonnes of gold, marking the second-highest annual purchase on record, following 2022’s peak of 1,082 tonnes.

The survey reveals that 29% of central bank respondents plan to increase their gold reserves in the next year, the highest percentage since the survey’s inception in 2018.

Additionally, 83% of central banks hold gold as part of their international reserves, with 88% citing it as a long-term store of value and inflation hedge, followed by “performance during times of crisis” at 82%.

China’s Strategic Shift: Sell USD, Buy Gold

“While the motivation of individual central banks for owning gold may vary, many reserve portfolios have one thing in common: the share of USD has been declining, while gold holdings have risen,” Widmer noted.

The People’s Bank of China (PBoC) exemplifies this trend by diversifying its foreign reserves and increasing its gold holdings by 8 million ounces, equivalent to $51 billion, since January 2023.

This move has raised the proportion of gold in China’s total reserves from 3.5% in December 2022 to 4.9% in April 2024.

Concurrently, China’s holdings of U.S. Treasuries have plummeted by $102 billion over the past year, reaching a 25-year low of $767 billion in March 2024.

Impact Of Federal Reserve Policies, Timeless Safe-Haven Appeal

Bank of America forecasts that if the Federal Reserve cuts rates and the U.S. dollar weakens in the second half of 2024 and into 2025, investor buying will drive gold prices higher.

The investment bank believes that gold would show its strength even if investor dissatisfaction with the U.S. Treasury market grows, prompting higher yields.

According to Widmer, in an environment of declining liquidity and resiliency in the Treasury market, gold is expected to maintain its allure as a safe haven asset. While a sharp increase in Treasury yields might initially push gold prices down, the search for stability would likely redirect flows into the gold market.

“The long-standing inverse relationship between gold and rates has become more tenuous already and in our view, this is unlikely to change going forward,” the analyst stated.

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Originally Posted June 24, 2024 – Gold Prices Set To potentially Climb On Fed Rate Cuts, Geopolitical Tensions, Bank of America Says