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The largest global investment funds and banks expect gold prices to continue to rise gradually in the coming months, supported by the expected gradual start of reducing interest rates by the US Federal Reserve, the continued strong demand for the precious metal by central banks and the rise in geopolitical risks, noting that the level of $3,000 per ounce is not excluded in the long term.
Senior officials in these institutions confirmed to Al Bayan their positive outlook for the precious metal, that it will remain a basic element in the diversified investment portfolio, and that strong demand from Asian central banks, especially from China and India, will maintain a balance between supply and demand levels.
Alternative opportunities
Manpreet Gill, chief investment officer for Africa, the Middle East and Europe at Standard Chartered, expects gold prices to stabilize at $2,450 to $2,500 per ounce over the next six to 12 months. According to Gill, this forecast is based on two main factors, the first of which is the expectation that US dollar bond yields will gradually decline as the Federal Reserve begins its rate-cutting cycle. This is usually a tailwind for gold, as bond yields represent the main alternative to holding the non-yielding metal.
The second factor is the expectations of continued strong demand for the metal by central banks, which is expected to maintain the balance of supply and demand. It is worth noting here that we expect demand for gold to remain strong in major markets such as India, especially in light of the well-supported economic growth and changes in tax policies that we have recently witnessed.
“We typically see real bond yields (net of inflation) as one of the main drivers of gold prices,” said Gill. “As we know, gold does not offer a return, so it tends to be very sensitive to changes in US dollar bond yields, which are the main alternative to holding the precious metal. This relationship has held up well over the past several decades, and it also helps explain gold’s gains in recent weeks, which we believe have been driven by rising expectations of a Fed rate cut and, therefore, lower bond yields in the near future.”
He added: But this relationship has broken down over the past two years. So, we believe that the strong demand from central banks since 2022 explains this. It is worth noting that after the start of the war in Ukraine, central bank demand for gold rose sharply, which means that price declines were less deep than usual, and that strong demand from central banks led to a tighter balance between supply and demand.
He noted that gold performs well as a risk-off asset class – for example, we have seen it rise when stocks decline, however, this negative correlation tends to only last for relatively short periods of time.
Gold prices have seen a significant rise over the past 18 months, supported by strong demand from central banks and strong physical demand for the precious metal in Asia, said Mohammed Al Fahim, Managing Director and Head of BlackRock in the UAE.
Gold prices are expected to continue to rise gradually in the medium term, and we see several factors such as rising geopolitical risks, continued higher-than-expected inflation, and high valuations of stocks in the markets in general, as strong drivers for increasing investment in gold today.
In contrast, when looking at the movement of gold prices, we find that the performance of the precious metal stocks was somewhat disappointing, according to Al Fahim, and the main reason, in our view, is that producers have faced widespread inflation in costs over the past three years, and therefore the rise in gold prices has not achieved the expected growth in profit margins.
“Another factor is that gold stocks seem to be out of demand by investors, which is reflected in the outflows from active gold stock funds and index funds. Going forward, we believe that the worst of cost inflation is over, while our experience suggests that the best time to build momentum and positivity on gold stocks is when market sentiment is severely down,” Al Fahim added.
Al Fahim pointed out that at current gold prices, producers are generating strong levels of free cash flow, but the most important factor here is what they will do with the money, so we see the second quarter performance disclosure season as being of particular importance.
Norbert Rucker, head of economics and next generation research at Julius Baer, expects gold prices to rise above $2,500 per ounce, as gold’s safe-haven properties shine in an increasingly polarized world.
“The willingness to pay for gold as insurance seems to be structurally inflated, particularly by Asian central banks,” he said. “However, the summer lull has set in and Chinese buyers as well as the Western world have been absent recently, which is putting the focus back on the US and the Fed, with expectations of rate cuts supporting gold prices.”
“The trend of major central banks cutting interest rates, coupled with continued geopolitical risks, provides a positive and supportive environment for gold,” said Dr. Nanette Hechler-Faydherbe, Chief Investment Officer, Europe, Middle East and Africa, Head of Investment Strategy, Sustainability and Research, Lombard Odier Group. “Our outlook for the precious metal remains positive, and we maintain our target of $2,600 per ounce within 12 months,” added Hechler.
$3000 per ounce
“Gold prices are likely to remain stable in the medium term with the possibility of slight gains, given the expectation of increased demand for gold as a safe haven asset, due to concerns about rising inflation and economic turmoil caused by current geopolitical tensions,” said Bas Kooiman, CEO and Asset Manager at DHF Capital. “While a long-term target of $3,000 per ounce is not out of the question, the strong growth data for this year suggests that the price could stabilize or decline slightly towards or above $2,500.”
He continued: “In general, balanced expectations indicate that gold will remain a key element in a diversified investment portfolio, given the stability it provides in light of market turmoil.”
