Banks that Saw US$3,000 Gold Coming Are Staying Bullish for Now

Bank of America Corp., Citigroup Inc., and Macquarie Group Ltd. have stood as vocal advocates for gold amidst a dramatic rally that pushed prices to record highs above US$3,000 an ounce. As worries about the global economy loom larger, these financial powerhouses see ample reasons to maintain their bullish outlook on gold.

Since late 2022, gold has surged, propelled by significant central-bank purchases and a buying frenzy in China, nearly doubling its value in just over two years. Currently, gold’s enduring status as a safe-haven asset is attracting major investor interest.

Gold prices recently exceeded the $3,000 an ounce threshold, amidst growing concern about the economic risks stemming from trade disruptions. As national and global apprehensions mount, many analysts continue to adjust their price targets upward.

“We believe there are still significantly bullish developments yet to come for gold,” stated Marcus Garvey, Macquarie’s head of commodities strategy. Garvey recently increased the bank’s top-end price prediction from $3,000 to $3,500. “I don’t see indicators suggesting that this rally is excessively frenzied or overextended.”

The following are critical factors that have Wall Street convinced that gold’s blistering rally may have further upside potential:

Renewed Interest in Gold ETFs

Investors have shifted to net buyers of physically-backed gold exchange-traded funds (ETFs) this year, after four years of selling. North America witnessed a significant inflow in February, marking the largest single-month increase since July 2020, partly spurred by a global rush to import bullion into the US due to a substantial price differential between New York’s Comex and the London spot market.

Citigroup analyst Max Layton suggests that concerns over a slowing economy might lead US households to diversify their portfolios by including gold ETFs. “That’s the major development propelling gold to the next level,” he said.

Matt Schwab, from Quantix Commodities, emphasizes that the continuation of this ETF buying trend is pivotal to gold’s further ascension. During past economic uncertainties, notably during the pandemic, ETFs played a crucial role in gold’s spike to then-record highs.

Potential Short-term Setbacks

While gold generally prospers during extended periods of economic weakness, analysts warn that the metal could experience short-term setbacks if there is a significant stock market selloff. In such situations, investors may choose to liquidate profitable gold positions to cover losses in other areas.

“It can get chaotic,” noted Bart Melek from TD Securities, referencing previous crises. However, a robust long-term outlook remains, with gold expected to surge further despite these possible hiccups.

Michael Widmer from Bank of America concurs, predicting short-term turbulence but maintaining a bullish long-term outlook, with projections aiming for $3,500.

Chinese Influence

Buying may reignite in China this year, spurred by government policies permitting insurers to invest in precious metals. This could introduce an additional 300 tons of demand, potentially influencing global markets significantly.

Impact of Interest Rates and Fiscal Policy

Remarkably, gold’s bull run has defied a rise in interest rates, which typically act as obstacles. Traditionally, higher inflation-adjusted rates decrease gold’s attractiveness since it offers no yield, making safe returns in government bonds more appealing.

Higher debt levels, however, have prompted some investors to consider credit risks in the bonds of developed economies, redirecting interest towards gold. According to Macquarie’s Garvey, unsustainable fiscal policies effectively devalue currencies, inadvertently increasing gold’s appeal as a stable “hard currency.”

Central-Bank Buying Continues

Central banks have been a substantial driving force behind gold’s rally. Even with rising prices, they continued purchasing 18 tons of gold in January alone. China’s central bank, crucial to the previous year’s spectacular rally, expanded its reserves for a fourth consecutive month by February.

A rising trend in central bank buying, coupled with heightened investor demand fostered by policy uncertainties, could drive gold prices even higher. Current analyses project a continuously bullish outlook, maintaining a structural rise in central bank gold purchases.

The current gold market scenario reflects not only immediate market dynamics but also longer-term economic shifts. As financial institutions remain optimistic, the glittering allure of gold shows no signs of dimming, for now.