ANZ Research says physical supply-demand fundamentals should support gold strongly in the event of a pullback as central bank purchases of late reflect a structural change, in a week where the price breached US$1,550 per ounce which London bullion broker Sharps Pixley said could be a new floor.
Gold rose sharply in Aug. 29 morning trading in Europe before falling again, but Sharps Pixley said the precious metal could have the momentum to "move higher and breach the US$1,550/oz level permanently," though perhaps not until the following week.
Gold had briefly hit US$1,555/oz earlier this week, a level not seen since April 2013, according to CNN Business.
UBS strategist Joni Teves said persistent uncertainty, a "relatively high threshold for easing investor concerns" about trade and falling bond yields are all making gold look more attractive, to the point where the precious metal could reach US$1,600/oz by the end of 2019, CNN added.
Central bank moves
SP Angel said in an Aug. 27 note the wider trend of "de-dollarization" — or central banks buying into alternatives to the U.S. dollar — may also strengthen gold prices.
In the current environment with high levels of uncertainty in emerging market currencies, ANZ said in an Aug. 27 note that it sees "good reason" for countries like Russia, Turkey, Kazakhstan and China to continue to diversify their portfolios by boosting gold reserves as an alternative to paper reserves.
ANZ said central banks' gold purchases of late reflects a "structural change."
Central banks together owned nearly US$1.54 trillion of gold in the first half of 2019, comprising about 10.5% of foreign reserves, and while the U.S. Federal Reserve has the largest with 8,133 tonnes followed by Germany and France, ANZ noted that Russia's central bank has been the largest and most consistent buyer of gold of late.
Russia's central bank has almost doubled its reserve in the last five years, while the People's Bank of China holds nearly 1,936 tonnes, which equates to only 3% of its total foreign reserve holdings, giving China "plenty of room to increase its allocation," ANZ said.
In regards to the physical supply of gold, ANZ expects Russia and Canada's gold production to rise incrementally and Australia, the world's second-largest gold producer, to continue its "steady and strong" supply growth in 2019.
The strong gold sentiment has driven Australian financial advisory Hartleys to lift its price target on one of the country's surging gold miners, Northern Star Resources Ltd., from A$11.30 per share to A$11.60 per share, according to an Aug. 28 note.
Yet ANZ also warned that the depletion of Australia's ore bodies will "weigh on production growth beyond 2020," and cited Wood Mackenzie data that up to 40 of the country's gold mines are at risk of possible closure.
ANZ said falling mining investment is likely to dent mine supply in the coming decade, while improving demand for jewelry, the largest source of demand for gold, is "fundamental to gold's future."
Demand dynamics
The bank said rising incomes and economic reforms in China and India — which combined make up 60% of global jewelry demand — support those countries continuing that trend.
Yet ANZ said gold prices are really dictated by investment demand which, though more volatile than jewelry, has grown by an average of 14% per annum since 2001.
Gold prices are particularly driven by investment demand via exchange traded funds, which are backed by physical gold and therefore directly influence the physical market.
ANZ noted that strong inflows into ETFs in 2016-17 and the fourth quarter 2018 until January 2019 correlated strongly with higher gold prices.
Changes in holdings of gold-backed ETFs are also related with equities, ANZ said, citing 2016 when an equity market bull run saw investors switch out of gold-backed ETFs and into equities.
Accordingly, the bank sees an "immense" risk of an equity sell-off given the worsening economic backdrop amid rising trade tensions, in which case gold fund inflows will rise further.
Citigroup said gold prices could rally further if it breaches a technical level against the S&P 500 Index, Bloomberg reported Aug. 28.
A Citigroup strategist said the ratio between bullion and the S&P 500 Index is "testing key pivots that extend up to the Christmas highs. It is only a matter of time before a significant bullish break occurs that could trigger a rally to the tune of 25% in favor of gold."
