The gold market is expected to ride a wave significantly higher as the Federal Reserve cuts interest rates later this year and rising debt further fuels economic uncertainty, according to Bank of America analysts.
Michael Widmer, commodity strategist at the bank, sees the potential for gold prices to hit $3,000 an ounce in the next 12 to 18 months. However, he added that the market needs to see a pickup in investment demand, which is unlikely to happen until the Federal Reserve gives a clear signal that it is ready to cut interest rates.
“If non-commercial demand picks up from current levels on the back of the Fed rate cut, the yellow metal could push higher again. Beyond inflows into physically-backed ETFs, a pickup in LBMA clearing volumes would be an encouraging signal,” Widmer said in a report. “A gold price average of $2,500/oz this year could be justified if investment demand increased by around 20 per cent. Yet, non-commercial purchases were up by only around 3.0 per cent YoY in 1Q24, enough to justify an average gold price of just $2,200/oz YTD,” said Widmer.
Mohamed Hashad, chief market strategist, Noor Capital, said the yellow metal is benefiting from a weaker dollar, edging up by 0.45 per cent amidst firm US Treasury bond yields. Investors are closely watching the upcoming PCE The Federal Reserve’s favoured inflation indicator, the PCE Price Index, is expected soon, and investors are eagerly monitoring it since it may affect expectations for a rate cut. The CME FedWatch Tool now predicts a 66 per cent chance of a rate cut in September, up from 59.5 per cent, which has caused the US Dollar Index (DXY) to decline.
“Investors seeking safety are turning to gold as risk appetite deteriorates. US Treasury bond yields remain flat, with the 10-year Treasury note standing at an unchanged 4.253 per cent. The US Dollar Index (DXY), which tracks the value of the American currency against a basket of six other currencies, has declined by 0.26 per cent to 105.53,”said Hashad.
“The price of gold is rising and is currently testing the $2,330 head-and-shoulders neckline. Nevertheless, following the formation of a “bearish-engulfing” chart pattern last Friday, the overall bias is still negative. This supports the Head-and-Shoulders pattern even more and points to more decline for the unyielding metal. $2,300 per ounce would be the next support level. If that level is broken, it may drop further to $2,277, the low from May 3, and then to $2,222, the high from March 21. Deeper losses might aim for the $2,170–$2,160 Head-and-Shoulders pattern target. On the upside, if gold reclaims $2,350, it would expose additional key resistance levels, including the June 7 cycle high of $2,387, with potential challenges toward the $2,400 mark,” said Hashad.
Bank of America sees rising bond yield volatility as another tailwind for gold. Widmer noted that gold remains an attractive reserve asset as central banks worldwide reduce their exposure to the dollar and Treasuries.
The report noted that China is the dominant force in both the gold market and Treasuries.“China has been the biggest official gold buyer in recent years, while the share of USD in its portfolio has declined. Indeed, the PBoC has been steadily diversifying its foreign reserves, with gold holdings increasing by 8 million ounces, equivalent to $51 billion, since January 2023, lifting the share of the yellow metal in total reserves from 3.5 per cent in December 2022 to 4.9 per cent in April 2024,” Widmer said. “At the same time, the data shows that China’s holdings of US Treasuries (UST) dropped by $102 billion in the past 12 months to a 25-year low of $767 billion in March 2024.”
“Increased macro uncertainty today may pose an even greater threat to market stability in a context where growth in government debt has vastly overwhelmed the intermediation capacity of the market,” Widmer said. “Looking at the UST tail risk, how could this actually play out? In our view, a sharp move higher in rates would initially be accompanied by lower gold prices. That said, the search for a ‘safe-haven’ asset will ultimately divert flows into the gold market, so the yellow metal will then likely pick up. 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,” Widmer said.