In an environment of unconventional monetary policy and central bank gold purchases, analysts estimate that gold may reach $2,000 an ounce in the coming years.
As China weaponized its currency, devaluing the yuan below a key level amid the escalating US-China trade war, it also played a few key maneuvers behind the geopolitical stage of public awareness: China’s central bank increased its gold reserves.
In July, the People’s Bank of China added 10 tons to its gold reserves, following the 84 tons that it had accumulated since last December (2018). China now holds 62.26 Million ounces of gold.
Fears of a global economic slowdown have contributed to gold’s rise toward a six-year high. In addition to the Fed’s easing policy, adding to that the ongoing uncertainties of the US-China trade war, demand for gold as a safe haven has continued to surge among investors.
Into this environment of increasing demand for the yellow metal, China (in addition to Russia and Poland) has supported the rise in gold prices, particularly as their yuan devaluation has prompted the need for a safe haven.
China is taking steps to further diversify away from the US dollar. They are accumulating gold in significant amounts but they are doing it slowly--making quiet and incremental purchases that are not quite large enough to disrupt the gold market.
As China continues its long-term efforts to diversify their foreign exchange reserves, the country is likely to continue its gold accumulation strategy.
But China is not the only country scooping up the yellow metal.
According to the World Gold Council (WGC), global bullion demand has surged to a three-year high, owing to purchases made by central banks across the globe.
And based on a WGC central bank survey, 54% of the participants plan on continuing their gold purchases over the next 12 months.
Some Analysts See Gold at $2,000 on the Horizon
Gold has been basing within the $1,100 to upper $1,300 range over the last five years, breaking above this range as recently as May.
In a world of growing uncertainty and shrinking “safe assets,” gold has become more attractive than what many investors might have thought only a few years back.
In an interview with CNBC, TD Securities’ commodities strategies, Daniel Ghali said “We have a long position trade on. We are targeting $1,585...We do think gold is on its way higher for the time being...Over the coming years as the likelihood of the unconventional policy becomes more of a reality, I could see a case for gold at $2,000.”
What he’s referring to are the years of unconventional monetary policies that have been (and are continuing to be) implemented across the world’s central banks--the effect of which may be leading to a pile of negative-yielding debt.
“Negative yields are symptomatic for the search for safe assets. The reason they’re trading at negative yields is because the demand for safe assets is bigger than the supply for them,” says Ghali. “I would argue we are likely on the cusp of a multi-year bull market for gold.”
Aside from TD Securities, Bank of America Merrill Lynch’s commodities strategist, Michael Widmer, also sees a multi-year bullish case for gold. But unlike Ghali, he sees the world’s central banks’ unconventional policies as contributing to an environment of “quantitative failure”--where stimulus may no longer have an effect in propping up an economy.
Widmer mentions in a note, “Such a sell-off may prompt central banks to ease more aggressively, making gold an even more attractive asset to hold. We have a relatively conservative 2Q20 forecast of $1,500/oz, but in this scenario, we see scope for gold to rise towards $2,000/oz.”
In addition to this, central banks have also become net buyers of gold, motivated in part toward de-dollarization, or diversifying away from the US dollar, further driving up the price of gold.