Although the US dollar and real rates are not lending support, investment demand is pushing gold prices higher again
Substantial buying momentum means the price of gold has been rising again recently and is now back close to its mid-April highs. Despite stable US real rates and a strong US dollar, investment demand has increased, as the rise in gold purchases by ETFs shows.
The impact of massive liquidity injections by central banks and renewed tensions between US and China since the start of May seem reasons enough for now to keep investment demand rising, as seen in the relentless increase in ETFs’ gold holdings. ETFs accounted for slightly more than 50% of global investment demand for gold in Q1. Consequently, our previous three-month projection of USD1,580 per troy ounce seems likely to be surpassed. Although jewellery and official demand are expected to be weak this year, investment demand should remain strong enough to continue pushing gold prices higher.
Again, real rates and the US dollar, two key factors in investment demand, are not seen as being particularly supportive in the next few months. But elevated uncertainties linked to the flood of liquidity into the financial system and the increase in global debt, coupled with elevated geopolitical uncertainties, may further increase safe-haven demand for gold.
Overall, while the risk-reward ratio is not particularly attractive for gold, demand for insurance against heightened uncertainties may mean the uptrend in gold prices persists for a while. However, the lack of other types of gold demand, together with short-term trends in the US dollar and real rates, mean we continue to expect periods of price weakness that could improve gold’s attractiveness.
We have revised up our three-month projection for gold prices to USD1,630 per troy ounce from USD1,580. We are also raising our six-month projection to USD1,730 (compared to USD1,680 previously) and 12-month projection to USD1,800 (compared to USD1,780).