PETALING JAYA: Gold’s sharp pullback from record highs has done little to dent its longer-term appeal, with analysts saying central bank demand, reserve diversification and geopolitical uncertainty continue to support the precious metal.
Spot gold traded near US$4,328 per troy ounce last Friday, down about US$1,272 from its late-January record high of just below US$5,600, as a stronger US dollar and a “higher-for-longer” US interest rate outlook weighed on sentiment.
Despite the correction, market watchers said central bank demand, reserve diversification and geopolitical uncertainty continue to provide structural support for gold prices, with some expecting official-sector buying to become more visible should prices fall further.
SPI Asset Management managing partner Stephen Innes warned old could, however, face further consolidation in the near term amid a more challenging macroeconomic backdrop.
“Gold is facing a combination of rising Treasury yields, a firmer US dollar, and a US economy that continues to prove more resilient than many expected,” he told StarBiz.
He said these factors have created headwinds for bullion, even as the longer-term investment case remains intact.
The structural story has not changed.
Central banks continue to diversify reserves, sovereign debt levels continue to climb globally, and geopolitical fragmentation remains a powerful long-term tailwind,” Innes said.
“What has changed is that the market is currently focused on cyclical headwinds rather than structural support.”
Separately, OCBC foreign exchange strategist Christopher Wong said gold’s near-term direction is increasingly driven by macro factors, particularly crude oil price and its spillover effects on inflation, yields and US interest rate expectations.
Despite near-term uncertainty, Wong said the broader structural backdrop for gold remains “somewhat constructive.”
“Central bank reserve diversification, strategic allocation demand and ongoing interest in portfolio hedging continue to provide an underlying anchor for prices,” he said.
“However, for gold bulls to regain stronger momentum, the external backdrop likely needs to improve, particularly through softer oil prices, easing yields and a renewed dovish shift in the US Federal Reserve’s (Fed) expectations.”
Still, he said markets may remain uneven until there is clearer visibility on the access to the Strait of Hormuz and the terms of any US-Iran agreement.
Against this backdrop, Wong said the bank had earlier this month revised its gold forecast lower to US$5,100 by year-end, citing less supportive conditions.
He attributed the revision to less supportive market conditions, including persistently high oil prices, a hawkish shift in the Fed’s expectations, and the risk of softer gold demand from India, all of which could weigh on bullion in the near term.
On the other hand, Innes has maintained his year-end gold target at around US$5,500 an ounce, citing the continued “evolution of gold from a traditional commodity into a strategic reserve asset” as the key driver.
“Central banks are increasingly treating gold as a form of financial insurance against a world characterised by rising debt burdens, geopolitical uncertainty, sanctions risk and questions about the long-term sustainability of sovereign balance sheets,” he said.
Apart from that, Innes said reserve diversification is the second key structural driver, pointing to a gradual shift away from exclusive reliance on government bonds toward a broader reserve mix that includes gold.
He also highlighted investor flows as a potential upside catalyst.
“Central banks have continued buying, but exchange traded funds participation remains well below the levels that characterised last year’s surge.
“If investment flows return alongside official sector demand, gold has the potential to move significantly higher,” he said.
On central bank demand, Innes said buying is largely driven by long-term allocation strategies rather than short-term price movements.
However, he added that deeper corrections could further strengthen official-sector buying interest.
“If gold were to fall into the US$4,200 to US$4,300 per ounce range, I would expect central bank buying interest to become much more visible,” he said.
“That would represent a meaningful discount from the highs while leaving the long-term reserve diversification story completely intact.”
However, he stressed that central banks are not looking for the perfect bottom but are instead building strategic reserves over time.
“Furthermore, any move into the low US$4,000s would likely be viewed by many reserve managers as an attractive opportunity rather than a reason to step away,” he said.
“Bottom line: The market is currently focused on yields, the dollar and positioning, while central banks are focused on the long-term architecture of the global financial system.
“That is why I remain constructive on gold despite the recent pullback.”
Recent World Gold Council data show central bank purchases rebounded in April after a decline in March.
Innes said the uptick was largely linked to Turkey’s reserve management operations rather than a broad shift in behaviour.
“Poland remains a major buyer, China has extended its buying streak to 18 consecutive months, and Eastern European and Asian central banks continue to dominate purchases,” he said.
