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Gold needs only a slight increase in investor purchases to justify $2,500 price tag, says BofA

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(Kitco News) With central banks continuing to buy gold, the de-dollarization trend accelerating, and the Federal Reserve stopping rate hikes, gold doesn't require a lot of new investor buying to justify a run to $2,500 this year, according to BofA.

"Bottom line: non-commercial purchases do not need to increase materially to justify gold hitting $2,500/oz this year. Inflows into ETFs will be critical and dynamics in assets under management will be a crucial indicator confirming whether price gains can be sustained," BofA commodity strategist said in a note Tuesday.

BofA sees the Fed's hiking cycle ending soon despite elevated inflation, which suggests that real rates may become less of a headwind for gold, the note described.

"Influenced by the recent banking turmoil, markets are pricing imminent rate cuts. At the same time, core inflation has been sticky and elevated price pressures, for example in shelter, highlight the risk of second round effects," the note said. "This confirms our long-held view: central banks have no silver bullet for fighting inflation and this should ultimately bring investors back to the market. The end of the hiking cycle will be critical for the yellow metal."

In the meantime, central bank gold buying has remained persistent. And on top of last year's record amounts of gold bought, the de-dollarization trend accelerates gold price growth.

"Terms of trade, current account balances, and ultimately gold prices are all interconnected," the strategists added. "Outright de-dollarisation is mentioned by only a handful of central banks. Yet the global economy is now moving towards a multi-polar world, reflected for instance in reports that Saudi Arabia is considering quoting oil in CNY. And the US currency in official foreign exchange reserves has fallen from around 70% two decades ago to 58% at present."

Russia is leading the way after it became the most sanctioned country globally, BofA pointed out.

"Russia's experience and those of its peer nations over the weaponisation of the USD has incentivised central banks to shift some of their assets into gold," the note explained.

BofA's price forecast sees gold rallying to $2,200 into the year-end. At the time of writing, June Comex gold futures were trading at $1,999.60, down 0.24% on the day.

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