• Buying spree by central banks lifts gold prices to fresh record highs.
• Gold’s rally defies traditional headwinds.
• Gold retreat is likely to be short-lived and could rise substantially by year end.

Spot gold prices have surged to a new record high of $2,448 per ounce recently, driven by heightened global demand amidst economic and geopolitical uncertainties. This surge was further fuelled by expectations of central bank interest rate cuts, which enhance gold’s attractiveness.

China has been the largest gold buyer

According to the World Gold Council the People’s Bank of China (PBOC) has been consistently acquiring gold for 17 consecutive months, resulting in a 16% increase in its gold holdings. This strategic move aligns with the global trend among central banks to diversify their reserves and hedge against global economic uncertainties.

In 2023 alone, China’s central bank acquired 225 tons of gold, bringing its total gold reserves to 2,262 tons, while India’s central bank purchased 16.2 tons. Consequently, China has surpassed India as the world’s largest gold buyer for the year.

Central banks demand

Gold holds significant place in central bank reserves due to its safety, liquidity, and return. Therefore, central banks are substantial holders of gold, holding roughly one-fifth of the total gold mined. Notably, the central banks of Poland and Singapore have been increasing substantially their gold reserves in 2023, ranking as the second and third largest buyers for the year. Central banks maintained the pace of the record 2022 purchases and have bought 1,037 tonnes in 2023.

Gold shines despite headwinds

Recent geo-political tensions in the Middle East have bolstered gold prices to fresh record highs on save haven demand; however, the subsequent cooling of the tensions led to a sharp decline in gold prices. After a strong surge since mid-February the price of gold declined more than 4% this week.

Apart from the conflict in the Middle East, traders would be closely monitoring the U.S. economic data this week. The Federal Reserve preferred measure of inflation – the personal consumption expenditures (PCE) price index would be released on Friday which is expected to show a rise in March. Such scenario would potentially influence the Federal Reserve to delay interest rate cuts as inflation has been rising this year, which in turn could adversely impact gold prices.

It should be noted that despite the recent surge in U.S. Treasuries and the U.S. dollar, which is typically a headwind for gold, gold prices have been surging higher on central banks buying, particularly China and geo-political instability. This shows that the aggressive central banks buying is providing crucial support for gold prices, which are likely to remain elevated in 2024.

Source: TradingView

Gold outlook and price forecast

Gold has rallied strongly over the past two months, despite surging U.S. dollar, rising inflation and signals for “higher for longer” rates from the Federal Reserve. These developments are generally bearish for gold, but the precious metal surged regardless.

Apart from central banks buying, the industrial usage in electronics is unlikely to diminish any time soon and could keep demand for physical gold in the years to come.

Once inflation start to steadily decline to the 2% target the Federal Reserve is likely to start to cut interest rates towards the end of the year. This is a big tailwind for the yellow metal and some of the strongest rallies have occurred during monetary easing cycles.

While gold is retreating from its record high and some consolidation could be seen in the coming months, higher price levels are likely in 2024 and 2025. Our year end target for gold is in the range of $2,500 and $2,550.

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1. World Gold Council