(Kitco News) - China’s central bank has not officially increased its gold reserves for the last two months; however, this move has done little to cool the marketplace as prices push back above $2,400 an ounce and are only roughly 1% away from new record highs.
Although China’s dominance in the gold market is credited for gold’s rally, analysts note that new momentum is building as the Federal Reserve lays the groundwork for potential interest rate cuts this year.
In a report published Wednesday, commodity analysts at TD Securities note that the price action in gold shows that the market is much larger than one central bank.
Gold’s rally back above $2,400 came after the U.S. Bureau of Labor Statistics reported that its 12-month core Consumer Price Index, which strips out volatile food and energy prices, rose 3.0% in June. The report noted that this was the slowest annual increase in inflation since April 2021.
“Below expected inflation data is compounding the precious metals rally after softer employment data had already bolstered expectations of a September start to the Fed cutting cycle. In this sense, a key macro cohort that has been on the sidelines thus far is increasingly likely to regain interest in gold,” said analysts at TDS in a note Thursday.
The Canadian bank remains bullish on gold, expecting prices to hit $2,700 by the start of 2025.
Not only are investors jumping back into the market, but the analysts pointed out that while the People’s Bank of China is sitting on the sidelines, other central banks are actively buying. Recent reports from the World Gold Council showed Poland and India buying gold in June.
“With this and the market's willingness to buy gold when there is more certainty surrounding the Fed's monetary policy, it is unlikely that the recent absence of the Chinese central bank in the physical market will prevent gold from hitting our Q1-2025 average target of $2,475/oz,” the analysts at TDS said in a note Wednesday. “It seems that gold prices remain a little too rich for the PBoC and they are waiting for a further pullback before resuming their gold purchasing program. But given that gold has started to rally on optimism that the Fed may cut rates as early as September, a significant price decline may not be in the cards anytime soon.”
Although China has ended its 18-month shopping spree, TDS doesn’t expect that it has ended its official gold purchase program. They explained that China has a lot of work to do if it wants its currency recognized on the world stage.
“China only has 5% of its FX reserves in gold. A 15-25% allocation is more consistent with its geopolitical peers and would provide a meaningful FX reserve diversification ratio. However, the Middle Kingdom would need to purchase an additional 135-274Moz over the coming years or decade. If prices don’t drop, as we believe, the resumption of purchases may happen sooner rather than later,” the analysts said.
In the current environment, TDS expects that it's only a matter of time before gold breaks May’s record prices.
“Since it looks like the official sector is still interested in using gold to diversify their FX reserves, more uptake from investors when the timing of rate cuts becomes more predictable should see gold rally to new records,” the analysts said.
