(Kitco News) - A growing distrust of the U.S. dollar is a major factor behind gold’s ability to hold critical support even as the market prices out potential Federal Reserve interest rate cuts, according to one international bank.
Looking ahead, Fabien Benchetrit, Head of Target Allocation at BNP Paribas Asset Management, said he expects gold will continue to move higher as investors focus less on gold’s opportunity costs and more on its safe-haven value.
“Since COVID, the forces of globalization appear to be ebbing. A new ‘multipolar’ dynamic is developing involving de-dollarisation, deglobalization, and international tensions. This new framework benefits precious metals,” Benchetritc wrote in a report published last week. “They appeal to investors as they provide a hedge against both the risk of an erosion of purchasing power in US dollars and geopolitics.”
Uncertainty around the Federal Reserve’s monetary policy stance has created some significant volatility in the gold market. Friday, gold prices saw their biggest drop in two years due partly to better-than-expected employment data that caused markets to price out a potential rate cut in September.
While gold prices dropped roughly 3% before the weekend, the market has managed to hold critical support above $2,300 an ounce. August gold futures last traded at $2,329 an ounce, up 0.18% on the day.
Benchetrit noted that gold’s resilience is part of a broader trend. While down from its recent highs, the market is up nearly 28% from its October lows and up more than 12% since the start of the year.
“A good performance for an asset with no yield. It does not seem to matter whether real rates rise or the US dollar appreciates, precious metals are resilient,” he said.
Benchetrit added that not only are central banks buying gold to diversify away from the U.S. dollar, but they are also moving the bullion back within their borders. Nigeria, South Africa, and Saudi Arabia are some of the central banks he named repatriating their gold reserves from the Federal Bank of New York.
“In addition, China is no longer accumulating US dollar reserves and is gradually selling off its holdings of US Treasury bonds,” he said.
Benchetrit also said that Brazil, Russia, India, China, and South Africa, which make up the core BRICS nations and the organization's new members Iran, Egypt, Ethiopia, and the United Arab Emirates, could be a new catalyst for higher gold prices.
“If they favor bilateral agreements in local currencies as an alternative to the dollar, a common currency pegged to a basket of assets including commodities could emerge, especially since these countries are the main producers of hydrocarbons,” he said.
In his report, Benchetrit also expects central banks to continue buying gold through 2024. The comments were made before China spooked the gold market after data showed that it didn’t buy end gold in May, ending an 18-month shopping spree.
“Demand for gold from central banks is not weakening, and the repatriation of their gold reserves from the US suggests a rising mistrust of a US-centric system,” he said.
Benchetrit said he expects retail investors to pay more attention to gold’s role as a safe-haven asset and ignore headwinds of higher bond yields and a stronger U.S. dollar.
“Both individual and institutional investors (asset managers, private banks) would appear to be underinvested: despite the high gold price, futures positions are below previous peaks as are the assets of the biggest gold ETF. This situation suggests the end of the rise in gold is not yet in sight,” he said.
