Gold rush

Gold prices have moved relentlessly higher since the start of March, reaching new all-time highs in US dollar. The significant upswing in gold prices is likely due to resilient demand from a variety of traditional sources as well as the global futures market, with a rise in investment, physical and jewellery demand more than compensating for the volatility in ETF and derivatives demand. it is likely that momentum investors, especially in China, have also played a role in the gold rally.

However, the large deviation from their 200-day moving average suggests that gold prices are overextended. Together with high US interest rates, gold is vulnerable In the short term to the probability of a slight deterioration in demand from central banks. Jewellery demand could start to suffer from high gold prices while the rise in 10-year real rates in the US since the start of the year could be a drag on investment demand in the West in particular (notably through ETFs and futures). And while central bank demand represents only a portion of official demand, it declined from November through to end-February. At the same time demand for gold bars and coins in developing economies could remain firm, and one notes that the gold premium in India and China has improved somewhat in recent weeks.

All in all, we could see a short-term pullback in the gold price, but given the multitude of drivers, gold could find support at around USD2,100-2,200 per troy ounce (compared with USD2,332 on 10 April).

Beyond tactical concerns, gold remains an attractive asset on a longer-term basis. Official demand is likely to remain strong as Western sanctions on Russian FX reserves push central banks to further increase their allocations to gold. The possibility of Fed easing, increasing US fiscal deficits, sticky above-target inflation, ongoing concerns over the performance of Chinese assets and structurally higher geopolitical uncertainties are all further potential drivers of higher investment demand.

Our current 12-month projection of USD2,350 looks somewhat timid compared to current prices and is likely to be upgraded when we have more visibility on Asian demand. But any upward adjustment is unlikely to be sharp. While remaining strong, official demand is unlikely to increase above 2022 levels while jewellery demand could decline because of gold’s reduced affordability. Finally, physical demand in China may not increase much from current high levels should the Chinese economy regain some momentum.