Or: Why the price of gold can reach dizzying heights

(BFM Bourse) – The precious metal has crossed $2,400 once in recent days, and has pushed back its historic records on multiple occasions, supported in particular by geopolitical tensions. Several banks have revised their gold forecasts upwards.

Undeniably, gold has been on the rise in recent weeks. The “barbaric relic”, as the famous economist John Maynard Keynes described it, recently crossed the threshold of 2,400 dollars once and is moving close to its historic record, now located at 2,431.52

dollars. Since mid-February, the precious metal has surged by around 20%.

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The higher the interest rates, the less theoretically attractive gold is, all things being equal. Unlike stocks (with dividends) and bonds (with coupons), gold does not produce income. Its price should therefore be hit by a rise in interest rates, because it then becomes less and less interesting to invest your money in gold rather than investing it.

However, bond yields have recently risen, with the rate on the ten-year US debt having exceeded 4.6% this week, levels which had not been known since November.

This rise is due to the persistence of inflation and American growth, which have led investors to be more cautious about rate cuts by the American Federal Reserve (Fed). Some intermediaries even go so far as to suggest a lack of reduction or even an increase in rates.

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Central banks and physical purchases

This change in rate expectations should theoretically have penalized the precious metal, which was not the case.

Gold was thus influenced by other factors. “It is difficult to identify a single major source of purchasing at this time, suggesting that purchasing is widespread rather than concentrated in a single segment or among a handful of participants,” judges UBS.

Central bank purchases probably partly explained the recent upward movement. According to the World Gold Council, the Chinese central bank increased its gold reserves in January for the fifteenth consecutive month, bringing them to 2,245 tonnes.

Bank of America also observes that physical demand in China (for coins and bars, for example) also appears strong. “Sales of jewelry and non-monetary imports (i.e. purchases that are not made by central banks, editor’s note) of gold reached record levels at the start of the year,” noted- She. “To some extent, this interest reflects the lack of alternative options for Chinese investors, with equity markets and real estate still not particularly representative,” the bank continued.

It is possible that this private interest is not limited to China. According to Wells Fargo cited by CNBC last week, wholesale distributor Costco generates between $100 million and $200 million per month from the direct sale of gold bars in its stores.

Gold also has its status as a safe haven as geopolitical tensions have increased. Particularly in the Middle East, with last weekend’s attack on Israel by Iran. “A tense geopolitical landscape adds to the list of reasons why investors might want to hold gold,” considers UBS.

American elections and the Fed as catalysts

As mysterious as this increase may seem, financial intermediaries believe that it may continue.

“We expect gold to reach new highs in the coming quarters, after a brief short-term pause,” UBS judged in early April. Even if the theoretical relationship with interest rates has not been verified recently, the Swiss bank judges that rate cuts by the American Federal Reserve will still support the precious metal in the coming months. After all, investors are still counting on two cuts from the US central bank, according to the CME Group’s Fedwatch tool.

Which would also weaken the dollar and thus make gold, like all raw materials, more attractive to investors whose reference currency is not the greenback.

“We do not believe that the macroeconomic relationships of gold are definitively broken,” explains the Swiss bank.

“A sharp increase in concerns about the debt and budget deficit of the United States could also lead to a rise in gold prices, particularly in the run-up to the American presidential elections,” the Swiss establishment also anticipates.

“Gold seems very attractive while the American government is moving further than in the past on the path of the Ponzi pyramid with regard to financing deficits,” echoes Stephen Innes of Spi Asset. Management.

Towards 3,000 dollars per ounce

UBS is not the only bank to be more optimistic about gold. Goldman Sachs recently revised its projections and now expects gold to reach $2,700 at the end of 2024 compared to $2,300 previously, citing “an unwavering bull market”.

Like its Swiss consumer, the American bank considers that the Fed’s rate cuts and the American election will constitute catalysts for gold.

“Most of gold’s rally since mid-2022 has been fueled by new (physical) factors, including a significant acceleration in EM central bank accumulation and retail buying in Asia. “The factors remain confirmed by current macroeconomic and geopolitical policies,” she further elaborates.

Citi, for its part, this week estimates that an ounce could even reach $3,000 in the next six to 18 months. This is due to vigorous physical demand and its attractiveness as a hedge against geopolitical risks, explain the bank’s commodity analysts cited by CNBC.

“According to Citigroup, gold will be boosted by increased flows from management players, which are already showing signs of catching up with demand from physical consumers in China and central banks. The start of a cycle “A Fed reduction – or a potential recession scenario – until 2025 will provide additional momentum to investment demand,” reports Bloomberg.

Citi believes that demand for gold via indicator funds (ETFs), which has been at half-mast for several months, could also provide a supporting factor.

Prices were stopped on Friday after the European market closed.Julien Marion – ©2024 BFM Bourse