Central bank gold purchases, the acceleration of de-dollarization, and the end of Federal Reserve interest rate hikes mean that a significant addition of investors is not required to justify the $2,500 per ounce price, according to the major US bank Bank of America.
“Our bottom line is that investor purchases do not need to increase significantly to justify the $2,500 price.” Inflows into gold exchange-traded funds (ETFs) will be critical. The dynamics of the assets they manage will be a crucial indicator of whether the price increase is sustainable, according to commodity market strategists at BofA.
Interest rates began to increase rapidly at the beginning of last year, but this growth has slowed. Despite high inflation, BofA believes the Fed’s rate hike cycle will end soon. That implies that actual interest rates (interest rates minus inflation) will no longer be a significant concern for gold. If the real interest rate rises, gold will fall in value, and vice versa.
“The banking crisis has significantly impacted the markets, and interest rate cuts are now expected.” At the same time, core inflation has been persistent, and price pressure has been intense, as seen in household costs. This increases the likelihood of a second round of inflation,” the bank’s analysts wrote. “This confirms our long-term view: central banks lack a silver bullet to combat inflation, which should eventually entice investors to return to the market.” The end of interest rate hikes will be critical for gold.”
At the same time, central banks have continued to purchase gold actively. In addition to record central bank gold purchases last year, the de-dollarization trend has accelerated and is supporting gold.
“The terms of trade, countries’ balances of payments, and gold prices are all interrelated,” the analysts added. In this regard, the world is moving toward multipolarity, as evidenced by various country reports. Only a few central banks have publicly discussed de-dollarization. Saudi Arabia, for example, is considering selling oil in yuan. And the US currency’s share as a reserve currency has fallen from 70% two decades ago to 58% today.”
According to BofA, Russia has the most sanctions, so it is the fastest to abandon the dollar.
“The experience of Russia and other countries in using the US dollar as a weapon has led central banks to place their assets in gold,” according to the report.
According to BofA, the price of gold will rise to $2,200 per ounce by the end of the year. The spot price of gold is currently $1,980 per ounce.