It’s been nearly 50 years since U.S. precious metal futures had their first day of trading, and gold has found a great way to celebrate: it has broken the counters about 30 times since the start of the year, dropping one record high after another. And investors reckon it still has considerable room to run, even above the psychological threshold of $3,000 an ounce.
The gold rally is being fueled by strong purchases from Western investors and the frenzy observed by central banks around the world.
“Central bank demand for gold has increased over the past 5 years, swallowing almost 1 in 10 ounces produced by the mining sector based on official figures,” Adrian Ash, director of research at BullionVault, said in a comment.
“The seemingly inexorable appetite for gold among central banks has become increasingly important to gold’s upside, both in terms of fundamentals and broader market sentiment,” he explained.
Gold demand from central banks soared after the US and its allies imposed sanctions on Russia following its invasion of Ukraine
Gold in the vaults increases
As MarketWatch writes, citing Ash data, the total amount of gold kept in their… “chests” by central banks has increased by almost 19% by weight since the summer of 2004 and has increased sevenfold – to $2.4 trillion in value in US dollars – led by Russia, China, India and Turkey.
According to the World Gold Council, the world’s official gold reserves totaled 36,089 metric tons in May 2024. This is quite a large amount, given that market estimates indicate that approximately 212,582 metric tons of gold have been mined historically.
Torsten Slok, chief economist at Apollo Global Management, points out to MarketWatch that gold prices are rising because central banks are buying, likely diverging from US Treasuries amid concerns about the US fiscal situation.
Gold and the half-century anniversary
The latest moves for gold come as CME Group Inc. expected to mark half a century since the first day of gold futures trading on its exchanges on December 31, 1974.
Central bank demand for gold has soared after the US and its allies imposed sanctions on Russia following its invasion of Ukraine, writes Brien Lundin, editor of the Gold Newsletter. “After the dollar was instrumentalized, central banks tried to insulate themselves by shifting their reserves away from the dollar and into gold,” he explained.
Thus, 2022 was a record year for gold purchases by central banks, with official purchases accounting for about a third of annual gold production. And this year they are expected to record new records, despite the slowdown recorded in recent months.
The fact that China, one of the biggest players in the market, does not always release official gold market figures shows that the precious metal sitting in the reserves of central financial institutions is clearly larger.
In fact, according to a recent article by analyst Jan Nieuwenhuijs, at Gainesville Coins, there is speculation that China has not stopped buying gold and has stopped announcing purchases to keep the price under control.
While central bank purchases have slowed in recent months, central banks have remained the engine for gold over the past two years, says Joe Cavatoni, senior market strategist at the World Gold Council.
Gold purchases by central banks were 3% above the five-year average in the second quarter, “extending the long-term positive demand trend from this sector,” he told MarketWatch, adding that “this is still a very healthy level of buying.”
East meets Western buyers
Brien Lundin particularly points to the “relative absence” of Western gold buyers. But with the US Federal Reserve seemingly on track for rate cuts starting next month, he reckons “western players” will also enter the market, pushing prices higher. He also clarifies that there is no real reason to expect either central banks or Chinese investors and servers to abandon their gold purchases as Western purchases come in to support the price.
So we could see the “first instance in the history of gold as an investable asset” where buyers in both the East and the West buy gold, Lundin said, referring to the period after 1971. The US monetary system was linked to gold reserves and “gold was money” until 1971, when President Richard Nixon ended the so-called gold standard.
If the market does see both the West and the East buying gold, that could “lead to much higher gold prices than we’re seeing today,” Lundin believes.
Unrelenting tension
Following record purchases of 1,082 tonnes in 2022 and 1,037 tonnes in 2023, the vast majority of central banks (81%) surveyed in the latest World Council survey expect global gold reserves to rise over the next 12 months.
In fact, one in three (29%) say they will increase gold reserves, the highest percentage since the annual survey of central banks was published in 2018.
As every year, the central banks that participated in the survey were asked to rate various reasons for holding gold reserves based on importance. Gold’s role as a store of value and protection against inflation was again rated highly at 42%. The performance of gold in times of crisis ranked even higher as a factor driving the increase in gold stocks. When asked about the role of the US dollar, 62% of central banks expect a slight or even significant decline in its share of total foreign exchange reserves from 55% in 2023. In contrast, 84% of survey respondents expect a slight or a significant increase in the proportion of gold in total reserves.
“2024 is the year gold will hit multiple highs,” Sabrin Chowdhury, BMI’s head of commodity analysis, told CNBC, highlighting gold’s role as a safe-haven investment.
Gold thrives on uncertainty
“Gold thrives on uncertainty… [και] uncertainty is at its peak,” he added, referring to the election contest in the United States, Ukraine’s recent invasion of Russia and escalating tensions in the Middle East.
Israel and Iran are on the brink of conflict after Iran vowed to retaliate following the assassination of Hamas political leader Ismail Haniya in Tehran. Israel has put its military on high alert and the US has sent reinforcements to the region to support its ally’s defenses.
Another factor driving gold prices is the increasing chances of a Fed rate cut in September. July’s Fed meeting boosted investor confidence that a rate cut next month is “on the table.”
“Once the Fed starts cutting rates, likely next month, gold could reach $2,700 an ounce,” reports Sabrin Chowdhury. And she’s not the only one who shares this bullish view.
Lower interest rates reduce the opportunity cost of buying gold, making it more attractive than interest-bearing assets such as US Treasuries, which compete with gold as a safe haven. Lower interest rates also put pressure on the dollar, making gold, which is denominated in dollars, more attractive to holders of other currencies.
Citi analysts are even more bullish, saying gold looks poised for a three- to six-month rally.
The bank added that it sees a target of $3,000 an ounce by mid-2025 and a fourth-quarter average price forecast of $2,550 an ounce.
Traders are also turning their attention to the annual economic policy conference in Jackson Hole this week, which could provide more clarity on the outlook for interest rates, with Fed Chairman Jerome Powell expected to address the gathering.
Source: ot.gr
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