Although gold prices have fallen from their peaks, they still remain above $2,300. According to Bank of America, the gold market may be treading water right now. But the Federal Reserve is expected to cut interest rates later this year and enter a significantly higher wave as rising debt further fuels economic uncertainty.
Gold prices could reach $3,000, according to BofA strategist, but…
The bank’s commodity strategist, Michael Widmer, said in a report that he sees the potential for gold prices to reach $3,000 per ounce in the next 12 to 18 months. However, Widmer notes that the market should see a recovery in investment demand. He adds that this is unlikely to happen until the Federal Reserve gives a clear signal that it is ready to lower interest rates. In this context, thestrategist makes the following statement:
If non-commercial demand picks up from current levels after the Fed’s rate cut, the yellow metal could rebound. Beyond inflows into physically-backed ETFs, a recovery in LBMA swap volumes would be an encouraging sign. An average gold price of $2,500 this year could be justified if investment demand increases by around 20%. However, non-commercial purchases only increased by around 3% YoY in Q1 2024, enough to justify an average gold price of $2,200 for the year.
Another tailwind for gold prices
Looking beyond U.S. monetary policy, Bank of America sees rising bond yield volatility as another tailwind for gold prices. Widmer notes that gold remains an attractive reserve asset as central banks around the world reduce their exposure to the U.S. dollar and Treasuries. The report notes that China is the dominant force in both the gold market and Treasuries. In line with this, the strategist shares the following assessment:
While China has been the largest official gold buyer in recent years, the share of the US dollar in its portfolio has decreased. Indeed, the PBoC has been steadily diversifying its foreign reserves, increasing its gold holdings by 8Moz since January 2023, equivalent to $51 billion, increasing the yellow metal’s share of total reserves from 3.5% in December 2022 to 4.9% in April 2024. It raises to . At the same time, data shows that China’s US Treasury bond (UST) holdings decreased by $102 billion in the last 12 months, falling to $767 billion in March 2024, the lowest level in the last 25 years.
‘The search for a safe haven will direct flows to the gold market!
A collapse in U.S. Treasuries is not the bank’s base case scenario. However, analysts warn that risks in the global economy are increasing and the US bond market appears fragile. Analysts warn that the U.S. Treasury market is one shock away from functioning smoothly. Analysts say the biggest problem is that rising government debt means market makers are unable to keep up with the growing supply of bonds, creating some lack of liquidity in the market. Bank of America notes that the U.S. Treasury market has doubled every seven years since 2001. Based on this, the strategist comes to the following conclusion:
Today’s heightened macro uncertainty could pose an even greater threat to market stability in a context where government debt growth has largely outpaced the market’s intermediation capacity. Looking at the UST tail risk, how could this really play out? In our view, a sharp rise in interest rates would initially be accompanied by lower gold prices. However, the search for ‘safe haven’ assets would eventually drive flows into the gold market, so the yellow metal is likely to recover. The long-standing inverse relationship between gold and interest rates has already become weaker, and in our view, this is unlikely to change in the future.
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