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
