Why gold prices could hit record highs despite setback

Continued central bank purchases and inflation hedging could see bullion go up to $3,000 an ounce, analysts say

Gold buying has been gaining in popularity among younger Chinese. AFP

Gold prices may have recorded a sharp drop at the start of the week but not much has changed in terms of the metal’s long-term bullish outlook, analysts say.

Bullion struggled to sustain near $2,350 on Friday as the US dollar rebounded after hotter-than-expected US core Personal Consumption Expenditures index data for March.

On an annual basis, headline inflation rose 2.7 per cent, the Commerce Department reported on Friday.

Core PCE, which excludes food and energy, rose 2.8 per cent annually, unchanged from February but above economists' expectations.

Gold hit a record high of $2,431.29 on April 12. However, the metal dropped by as much as 2.8 per cent on April 23, in its biggest intraday decline since June 2022, to trade as low as $2,324.96 an ounce, as safe-haven demand waned amid easing conflict risks in the Middle East.

The metal has found decent support around the $2,300 level, according to analysts.

“While the potential for a more meaningful correction exists, many investors who have missed the recent gold rally are eyeing opportunities to buy on dips,” said Fawad Razaqzada, market analyst at City Index and Forex.com.

“Supporters of gold point out that recently gold prices have shown resilience despite the elevated yields and dollar strength, with the dollar index remaining above 105.50.

"They argue that with prices no longer excessively overbought, the trend could resume, especially considering gold’s fundamental drivers such as continued central bank purchases and inflation hedging.”

While the potential for a larger correction is always there, markets could see repeated all-time highs in months ahead, Mr Razaqzada added.

Gold remains nearly 13 per cent higher this year after the recent surge to a record, with gains supported by central bank buying and demand from Asia, especially China.

In addition, gold buying has been gaining in popularity among younger Chinese.

The People's Bank of China has been buying gold continuously for 17 months, said Hani Abuagla, senior market analyst at Dubai-based investment platform XTB Mena.

China is currently in sixth place in terms of the amount of gold held, but it is not far from surpassing countries like Russia, France, or Italy, he said.

“Furthermore, there is often speculation that the official gold purchases by the PBOC are only a fraction of China's real purchases,” Mr Abuagla added.

The prospect of monetary easing by major central banks, and elevated tensions in the Middle East and Ukraine have also underpinned the rally.

However, gold’s rally has yet to strike a chord among investors who favour exposure to the metal through exchange-traded funds.

Worldwide holdings in bullion-backed ETFs shrank by more than 100 tonnes in the first quarter, hitting the lowest level since 2019 in mid-March, before a small uptick, according to Bloomberg.

“After years of above-forecast inflation, most global fiat currencies have lost significant value, leading investors to perceive gold as a reliable hedge against inflation, contributing to its strong performance,” according to Mr Razaqzada.

“This is the main reason behind gold’s bullish trend in recent years. Meanwhile, critics of gold argue that high yields and reduced expectations for Fed rate cuts in 2024 will likely support the dollar, keeping pressure on gold and other dollar-denominated metals. However, so far in 2024 this hasn’t been the case.”

After years of above-forecast inflation, most global fiat currencies have lost significant value, leading investors to perceive gold as a reliable hedge against inflation

Fawad Razaqzada,
market analyst, City Index and Forex.com

An additional source of worry for investors, and another supporting factor for gold is the rising levels of interest payment by the US government, he added.

The risk for gold price is a complete de-escalation of the geopolitical situation worldwide, which would reduce demand for safe-haven assets, according to Mr Abuagla.

The second factor that threatens gold and other metals is the potential return of high inflation, which would force central banks to return to raising interest rates, he said.

“It can be argued that gold seems overvalued after reaching historical highs, but looking at the metal in relation to the prices of other assets such as copper, oil, the S&P 500, or in relation to the still huge central bank balance sheets, it seems that gold still may have more upside ahead,” he added.

“The level of $2,500 per ounce does not seem distant, and more and more financial institutions present forecasts in which $3,000 seems to be the base scenario even for 2024.”

Analysts recommend that investment in gold should only constitute a part of a diverse investment portfolio.