PETALING JAYA: The bullish sentiments towards gold is likely to persist due to its role as a safe haven amidst global geopolitical turmoil.
OCBC foreign exchange strategist Christopher Wong said near-term developments such as a potential Gaza ceasefire could temporarily impact gold prices negatively in the short term, leading to a price correction.
The precious metal reached an all-time high of US$2,420 per ounce weeks ago, before retracing to its current level of US$2,360 a troy ounce at close Friday.
Wong attributed the price decline to fading concerns of geopolitical risks and hawkish repricing in US interest rates.
He added that the upcoming US economic data such as the consumer price index and producer price index reports this week will be the key factors that could revive concerns about higher interest rates and potential delay in cutting rates by the US Federal Reserve (Fed), which may have negative implications for gold prices.
“Medium term, we maintain a constructive outlook on the back of anticipation of real rates correcting lower, prospects of synchronised easing by central banks at some point, and gold’s role as a safe haven and portfolio diversifier,” he noted in a reply to StarBiz.
SPI Asset Management managing director Stephen Innes said given the proliferation of geopolitical risks and expectations of a contentious US election, gold will remain in demand.
Innes added that concerns about a potential recession will likely be the main driver of gold prices.
“As US economic data weakens, the Fed’s reaction function is expected to be dovish, weakening the US dollar and supporting gold markets,” he noted.
Regarding the relationship between gold and interest rates, Innes said that while gold typically exhibits an inverse relationship with interest rates, it may be less sensitive to higher rates due to central bank buying and geopolitical risks.
“However, when the Fed does cut rates, this is when gold could see significant upside,” he added.
Innes expects gold to trade at US$2,500 per ounce by year-end.
Discussing central banks’ gold purchases, he said central banks in Asia and strong physical demand are the primary drivers of gold purchases while US investors tend to favour money market funds offering a 5% yield.
“Consequently, exchange-traded fund demand for gold has been lukewarm. However, when central banks buy gold, they effectively remove it from circulation, leading to potential shortages in the market for decades to come.
“This fundamental dynamic is currently underpinning the gold market,” he said.
Adding to this perspective, Wong said central banks have significantly increased their gold purchases this year.
Citing data from the World Gold Council, Wong said central bank gold purchases exceeded 290 tonnes in the first quarter of the year, which is a record high.
“This trend may continue in the era of rising geopolitical tensions and it will be one of the factors supporting gold prices,” he said.
