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Gold to exceed $2000 in coming months and a terminal Fed Funds rate above 5%: BofA
BofA economists expect two final interest rate hikes by the US Federal Reserve in February and March, taking the terminal rate above 5%.
"At the same time, the European Central Bank still has some catching up to do, which will likely lead to a compression in policy rate differentials between the US and the Eurozone," BofA economists said overnight.
"This matters because it should ultimately help push the US dollar lower."
Gold is usually inversely correlated to US-German interest rate differentials.
"Against this backdrop, we believe both US rates and foreign exchange will become macro tailwinds for the yellow metal, pushing gold above $2000/oz in the coming months," the investment bank said.
Central bank purchases of gold hit a record high in Q3 last year and interest from monetary authorities, supporting gold prices against a weak macro backdrop.
"US and EU sanctions on the Russian central bank last year is encouraging some monetary authorities to add gold," said BofA.
"After all, the largest G-20 current account surpluses emanate from China, Saudi Arabia, and Russia at present, and they are buying gold rather than USD with it. As such, a recovery in macro gold demand from investors could finally make these central bank purchases count."