Gold soared to a record high on Monday, setting a new high-water mark of $1,965 this week amid US-China tension and falling US dollar.
The latest surge in demand out of China suggests gold could easily break $2,000, maybe even by the end of the week, said Stephen Innes, chief global market strategist at AxiCorp.
‘Gold is jumping in Asian trading hours again and is taking the rest of the precious metals complex higher.
‘US-China relationship strains further; concerns about inflation as oil prices firm up alongside the broad US dollar weakness which has gathered up speed and all of which makes for a perfect complimentary basket of drivers to push gold higher,’ Innes said.
According to the World Gold Council, China’s gold demand stabilised in June, with gold prices rising for the fourth consecutive month. The Shanghai Gold Benchmark rose 1.5% and reached a new high as the RMB strengthened, while the LBMA Gold Price in USD rose 2.6%.
China’s daily gold trading volume averaged $5bn in H1, a 72% rise year-on-year. In June, trading volumes totalled 1,710t, 14% higher from a month ago, noted Ray Jia, the council’s research manager, in his recent blog post.
Jia said bullish gold price momentum has also drawn in 11.6t or $647mn during the first half, lifting the total assets of Chinese gold-backed exchange-traded funds to a record high at $3.2bn.
The World Gold Council is expecting cautious consumption to continue in China, but as the economy recovers, it believes that will alleviate some of the headwinds for investing in gold.
Jia said the People’s Bank of China kept its gold reserves unchanged at 1,948t in June, accounting for 3.42% of its total reserves.
In fact, a study done by Invesco examining 56 central banks globally found that on average, 4.8% of total central bank reserve portfolios are now allocated to gold, up from 4.2% in 2019.
And 48% of those increased their allocations to replace negative yielding debt. This was seen as the key reason for moving into gold above more commonly-understood reasons such as diversification, return and an inflation hedge.
The yellow metal is still liked by several wealth managers from a diversification angle, with UBS, Pictet Wealth Management, DBS Private Bank and UOB Private Bank being overweight.
UBS already predicted that the metal will trade at $1,900/oz in H2. Risks such as new waves of Covid-19, Fed policy tweaks, and rising US-China tensions underpin the chief investment office’s view. The Swiss banking giant remains long gold.
DBS projected gold to rise above $1,900/oz by middle of next year. The lender’s price model for gold suggests the three important drivers for price are bond yields, the US Dollar Index and recession risk.