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FX | Economy | Commodities

FX Focus - Gold – Is It Time to Take Stock?

Posted on
Forecast Spot 0 - 3m 6 - 12m Long-term
GOLD 2427 2400 3000 N/A

*Forecasts as of May 2024.

 

  • Gold has risen above $2400 to a new high of $2450/oz with the market drawing strength from official sector buying, de-dollarization and geopolitical tensions related themes. Gold has risen even as US real interest rates and the dollar have surged to which it typically inversely correlates with. The main driver of the Gold rally has been central banks raising Gold reserves as a proportion of total FX reserves due to the ongoing de-dollarization theme. Private investors have also participated in the rally due to recent Mideast related geopolitical tensions.
     
  • Central bank buying however, has not just been limited to the PBoC in China but has spread well beyond to LATAM, Asia Pacific Rim ex China and Central, Eastern European, West Asian central banks. China’s private consumer demand for Gold also has also grown with onshore gold ETFs monthly inflows registering record highs in April – likely driven by retail accounts raising their allocation to safe haven assets to counter disinflation risks.  This has led Gold to rally 22.5% from the second-half February lows despite rising global real interest rates and a strengthening dollar.
     
  • But if Gold were to consolidate and stage a tactical reversal, the question is how far would prices fall before likely stabilizing. One way to look at this question is to examine the break-even cost of Gold mining production. As Gold prices have risen, so have mining costs for Gold that have soared since the pandemic. In 2022, the average all-in sustaining cost (AISC) in the gold mining industry rose by 18% YoY to US$1,276/oz. Currently, these costs have risen further to $1,600-$1,700/oz. Meanwhile, demand for physical Gold has also increased with central banks now absorbing a record 25-27% of annual gold mine production as well as the ~900t of Gold shed by physical ETFs since the 4Q’20 holdings peak. Alternate-fiat demand has also accelerated, with Gold bar/coin demand growth from family offices, and ultra-high net worth investors outperforming jewelry consumption recovery since the 2020 COVID shock.
     
  • The backdrop for Gold looks promising but catalysts for a further rally in prices, apart from central bank buying, seem to be missing. Higher for longer US rates should certainly give pause for thought and even the premise that an eventual easing in real interest rates as global central banks commence their rate cut cycle will support Gold prices, would need to see the inverse correlation between Gold and US real rates/ dollar re-establish. What is of more immediate concern is the sharp gain in Gold prices over such a short period of time has been almost entirely driven by central bank purchases. This is unprecedented and whether the eventual global central bank rate cut cycle will be enough to offset the impact from central banks stopping their purchases of Gold if their dollar diversification objectives are met is a legitimate question to ask.

 

The inverse correlation between aggregate central bank holdings of USD reserves as a proportion of total FX reserves (blue) and Gold prices (black) has strengthened

Source: Bloomberg, May 21, 2024

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MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

Hong Kong: This communication is distributed in Hong Kong by Citibank (Hong Kong) Limited ("CHKL") and/or Citibank, N.A., Hong Kong Branch (“CBNA HK”, Citibank, N.A. is organized under the laws of U.S.A. with limited liability). CHKL and CBNA HK provide no independent research or analysis in the substance or preparation of this communication. Although information in this communication has been obtained from sources believed to be reliable, CHKL and CBNA HK do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.

This communication is for general information only, is not intended as a recommendation or an offer or solicitation for the purchase or sale of any products or services and should not be relied upon as financial advice. The information herein
has not taken account of the objectives, financial situation or needs of any particular investor. Any person considering an investment should consider the suitability of the investment having regard to their objectives, financial situation and needs,
and should seek independent advice before making an investment decision. You should obtain and consider the relevant product terms and conditions and risk disclosure statement, and consider if it’s suitable for your objectives, financial situation or needs before making any investment decision. Investors are advised to obtain independent legal, financial and taxation advice prior to investing. Investments are not deposits, are not protected by the Deposit Protection Scheme in Hong Kong
and are subject to investment risk including the possible loss of the principal amount invested.

This communication does not constitute the distribution of any information in any jurisdiction in which it is unlawful to distribute such information to any person in such jurisdiction.

CHKL does not provide discretionary portfolio management services.

Singapore: This communication is distributed in Singapore by Citibank Singapore Limited (“CSL”) to selected Citigold/Citigold Private Clients. CSL provides no independent research or analysis of the substance or in preparation of this communication. Please contact your Citigold/Citigold Private Client Relationship Manager in CSL if you have any queries on or any matters arising from or in connection with this communication. Investment products are not insured under
the provisions of the Deposit Insurance and Policy Owners’ Protection Schemes Act of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme.

This communication is for general information only and should not be relied upon as financial advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person and is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Any person interested in the strategies or concepts mentioned herein should consult their independent tax, legal, financial or other advisors,
as appropriate. This communication does not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution or offer is not authorized or to any person to whom
it is unlawful to distribute such information or make any offer or solicitation.

Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making
an investment decision. Interested investors should seek the advice of their financial adviser about the issues discussed herein as appropriate. Should investors choose not to seek such advice, they should carefully consider the risks associated
with the investment and make a determination based upon the investor’s own particular circumstances, that the investment is consistent with the investor’s investment objectives and assess whether the investment product is suitable for
themselves. Although information in this document has been obtained from sources believed to be reliable, CSL does not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from Its use.

CSL does not provide discretionary portfolio management services.

UAE: This document is distributed in UAE by Citibank, N.A. UAE. Citibank N.A. UAE is licensed by UAE Securities and Commodities Authority (“SCA”) to undertake the financial activity as Promoter under license number 602003.

Citibank N.A. UAE is registered with Central Bank of UAE under license numbers BSD/504/83 for Al Wasl Branch Dubai, 13/184/2019 for Mall of the Emirates Branch Dubai, BSD/2819/9 for Sharjah Branch, and BSD/692/83 for Abu Dhabi Branch.

This is not an official statement of Citigroup Inc. and may not reflect all of your investments with or made through Citibank. For an accurate record of your accounts and transactions, please consult your official statement. Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making an investment decision. Each investor should carefully consider the risks associated with the investment and make a determination based upon the investor’s own particular circumstances, that the investment is consistent with the investor’s investment objectives.
At any time, Citigroup companies may compensate affiliates and their representatives for providing products and services to clients.

United Kingdom: This document is distributed in the U.K. by Citibank UK Limited and in Jersey by Citibank N.A., Jersey Branch.

Citibank UK Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Our firm’s Financial Services Register number is 805574. Citibank UK Limited
is a company limited by shares registered in England and Wales with registered address at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, Companies House Registration No. 11283101.

Citibank N.A., Jersey Branch is regulated by the Jersey Financial Services Commission. Citi International Personal Bank is registered in Jersey as a business name of Citibank N.A. The address of Citibank N.A., Jersey Branch is P.O. Box 104, 38 Esplanade, St Helier, Jersey JE4 8QB. Citibank N.A. is incorporated with limited liability in the USA. Head office: 399 Park Avenue, New York, NY 10043, USA.

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