Additional supporting the gold value are funding flows, which have been “very resilient,” in accordance with BofA analyst and lead writer Michael Widmer.
Within the financial institution’s International Metals Weekly report, he stated gold had disconnected from its conventional drivers due to vital dislocations buried beneath headline inflation, rates of interest and foreign money strikes. These market forces raised the enchantment for buyers to carry gold in a portfolio.
BofA expects the gold value to common $1,925 per ounce in 2022.
Widmer stated inflation at 7% put the US Fed in a troublesome place however cautioned that tighter financial coverage won’t be the silver bullet to repair the issue.
“Whereas a number of the inflation is pushed by home components, others, together with provide chain dislocations, will not be; additionally, a mixture of short-term and extra persistent drivers are at play. We additionally be aware that the Fed’s response perform has modified.
“Gradual hikes, accompanied by declining inflation, regular financial development, and secure markets stands out as the excellent state of affairs for US financial coverage, however this can be a troublesome path. The chance of a coverage mistake is excessive, and rising fairness volatility tends to assist perceived secure havens, gold included,” stated Widmer.
The financial institution additionally noticed that coverage normalization contributed to a virtually 50% drop in bitcoin and crypto belongings, which is one other issue doubtless supporting strong gold inflows. Furthermore, rising market nations have been internet gold patrons in recent times, partially over issues about how the shift away from ultra-lose financial coverage in DMs would influence their portfolios. Whereas EM central banks allocate 6% of their portfolio to the yellow steel, proudly owning round 12% would optimize the risk-return profile.
“So, EMs have vital scope for gold additions, notably after the latest crypto fiasco in El Salvador. Gold is a hedge for buyers and EM central banks alike. And this issues as world imbalances make a comeback, notably when geopolitics are flaring up,” stated Widmer.
The financial institution famous these world imbalances as rising, as was the VIX.