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Why gold prices could top record highs this year: AFR

Commodity strategists are tippinggold prices to hit record levels this year as turmoil in the global bankingsector intensifies recession fears, and central banks approach the end of theirtightening cycles. The commodity benefited from a spike in demand last monthfollowing the collapse of several US regional lenders that culminated in UBSbuying the 167-year-old Credit Suisse in a 3 billion Swiss francs ($4.5billion) takeover.

Concerns about contagion riskstriggered a sharp increase in the market-implied probability of a US recession,lifting gold prices above the key $US2000 an ounce level and within reach of its record $US2075.47 from the pandemic in 2020. The precious metal also rose above $3000 an ounce in Australian dollar terms and 165,000 Indian rupees for the first time. While gold has retreated as fears of a broader banking crisis eased, strategists believe prices will resume their ascent this year as the US Federal Reserve reaches the end of its aggressive tightening cycle, triggering a decline in real bond yields and the greenback. “Fed policy is likely to be key for gold over the medium term. The Fed is likely approaching a peak in the Fed funds rate, and we could see a pivot over the second half of this year,” says Warren Patterson, head of commodities strategy at ING.

“We would expect real yields tofollow policy rates lower later in the year, which should prove supportive forgold prices.” ING forecast a short-term pullback in gold prices as the UScentral bank delivers a final 0.25 percentage point rate increase in May,lifting the Fed funds rate to a range of 5 per cent to 5.25 per cent. However,the bank sees gold moving higher over the second half as the Fed begins toloosen monetary policy. ING has penciled in 0.75 percentage points of rate cutsin the fourth quarter, which will see gold prices average $US2000 an ounceduring the three-month period. Broker Citi is even more bullish, boosting itsthree-month and six to 12-month price targets to a record $US2100 and $US2300an ounce respectively. A dovish pivot by the US Federal Reserve at its Maypolicy meeting would add deeper conviction to Citi’s outlook. “We are structurallybullish gold ... into end-2023,” says Aakash Doshi, senior commoditiesstrategist at Citi. “It appears the price floor ... is now higher andbuttressed by an evolving central bank narrative, the compression in realyields at the belly of the US rates curve, and potential US dollar peak.” CMCMarkets agrees that an earlier Fed rate pivot would trigger another surge ingold prices and predicts they could rocket as high as $US2600 an ounce due to adecline in the US dollar and bond yields.Goldman Sachs believes the sharp spike in gold prices duringMarch can be almost entirely explained by an increase in fear-related demandamid the US banking crisis and increasing recession risks. With deposits atsmaller US regional banks declining at speed, Goldman economists shaved theirUS growth projections for the fourth quarter of this year and raised theprobability of the world’s largest economy tipping into recession within oneyear to 35 per cent. “While gold has struggled over the past year in a macro environmentlacking fear and wealth, we believe both factors are stacked this year,” saysSabine Schels, senior commodities strategist at Goldman Sachs. The brokerupgraded its 12-month price target to $US2050 an ounce but says it will bechallenging for prices to move sustainably above $US2100 without the Fedcutting rates amid a US recession. Goldman expects the heightened risk of ahard landing to cause investors to start buying gold exchange-traded funds(ETFs) again following the significant outflows in 2022. Last year the goldmarket saw ETF outflows of a little more than 110 tonnes, and the secondconsecutive year of net selling, according to ING.

Despite the strength in gold prices at the start of this year, there wascontinued ETF selling over January and February; World Gold Council data showsnet outflows of 61 tonnes over the first two months of the year. However, thattrend reversed last month, with net ETF buying of 36 tonnes in the two weeksending March 24. “ETF holdings will largely depend on developments in thebanking sector and how successful policymakers are in restoring confidence,”ING’s Patterson says.

Weak demand from ETFs in 2022 was offset by strongbuying from central banks which purchased almost 1136 tonnes ofthe commodity last year.Turkey and China were the largest known buyers, adding 148 tonnes and 62tonnes respectively. This has continued in 2023, with Turkey and Chinaadding another 23 tonnes and 15 tonnes respectively in January 2023. “We expectcentral banks to remain buyers, not only due to geopolitical uncertaintiesbut also due to the economic climate,” Patterson says.

Emerging market central banks continue to boost demand for the preciousmetal following a record buying spree of 1135 tonnes last year. Goldman Sachs expects that figure to increase to 1300 tonnes in2023, fuelled by heightened geopolitical tensions.

National Australia Bank noted last week that central bank purchases of gold remain robust, but despite strongdemand, annual production costs for miners are rising while production levelsare forecast to drop. The bank expects gold output will fall by around 6.6per cent from 2023 to 2027 due to declining exploration activity as themining sector focuses more on base and battery metal operations. NAB continuesto see upside to gold prices from current levels, setting its forecast at$US1980 an ounce by the end of 2023.

Source: AFR Digital