Bank of America: Fed rate cuts and bond market friction could push gold prices up to $3,000

Forex Platform- The gold market may be in a state of consolidation for now, but is expected to rise sharply as the Federal Reserve cuts interest rates later this year and rising debt further exacerbates economic uncertainty, according to Bank of America.

Michael Widmer, the bank's commodities strategist, said in a note published on Monday that he believes gold prices could hit $3,000 an ounce over the next 12 to 18 months. However, he added that the market needs to see a pick-up in investment demand, but that is unlikely to happen until the Federal Reserve sends a clear signal that it is ready to cut interest rates.

The report notes, "If non-commercial demand picks up from current levels in the context of Fed rate cuts, gold could move higher again. In addition to inflows into physical-backed ETFs, a pick-up in LBMA settlement volumes would be an encouraging signal. If investment demand increases by around 20%, gold's average price of $2,500/oz this year is reasonable. However, non-commercial purchases are only up about 3% year-over-year in Quarter 1, enough to justify gold's average price of just $2,200/oz."

Aside from US monetary policy, Bank of America sees rising volatility in bond yields as another driver for gold, which Widmer notes remains an attractive reserve asset as global central banks reduce their exposure to the dollar and Treasuries.

The report points out that China is the leading force in the gold market and US Treasury bonds.

"China has been the largest official buyer of gold in recent years, while the share of the US dollar in its portfolio has declined," Widmer said. "In fact, the People's Bank of China has been steadily diversifying its foreign exchange reserves, increasing its gold holdings by 8 million ounces since January 2023, equivalent to $51 billion, boosting its share of total reserves from 3.5% in December 2022 to 4.9% in April 2024. Meanwhile, data show that China's holdings of US Treasuries (UST) have decreased by $102 billion over the past 12 months, falling to a 25-year low of $767 billion by March 2024."

While a Treasury collapse was not the bank's base case, it did warn that risks to the global economy were rising and the Treasury market looked fragile, with analysts warning that it would take just one shock for the market to function properly.

The biggest problem, analysts say, is that rising government debt means market makers can't keep up with the growing supply of bonds, creating some liquidity shortages in the market. Bank of America notes that the Treasury market has doubled in size every seven years since 2001.

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Widmer said, "In the context of government debt growth has greatly exceeded the ability of market intermediaries, today's increase in macro uncertainty may pose a greater threat to market stability. Looking at the tail risk of US Treasury bonds, how exactly will this happen? In our opinion, a sharp increase in interest rates will initially be accompanied by a decline in gold prices. That being said, the search for" safe haven "assets will eventually lead funds to the gold market, so gold prices may recover at that time. The inverse relationship between gold and interest rates has become more fragile for a long time, and in our opinion, this situation is unlikely to change in the future." The above is the analysis of the main factors affecting the fluctuation of gold prices. If you are interested, you can continue to pay attentionForex Platform。