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Amid the prospect of a rate cut by the Federal Reserve and geopolitical risks, gold prices continued to strengthen on Monday, rising to around $2,526.74 per ounce during the session and eventually closing at $2,517.82 per ounce, close to recent record highs. Gold prices hit a record high of $2,531.60 per ounce last week.

In the afternoon trading on Tuesday (August 27), gold futures surged again, trading around $2,549.70 an ounce, once again approaching its historical high.

Compared with previous gold bull markets, global central banks have also become the main driving force behind this round of gold price increases. The Polish central bank purchased 19 tons of gold in the second quarter, becoming the world's largest central bank gold buyer.

Global central banks boost

According to the World Gold Council (WGC), the total net gold purchases of central banks around the world reached 1,037 tons in 2023, adding more than 1,000 tons of reserves for the second consecutive year. In 2022, the total gold purchases of central banks around the world reached 1,136 tons, the highest level since 1950. In the first six months of this year, central banks around the world continued to purchase a net 483 tons of gold, an increase of 5% from the record level of 460 tons in the first half of 2023. Joe Cavatoni, senior market strategist at WGC, said that global central bank gold purchases in the second quarter were 3% higher than the five-year quarterly average, "still a very healthy level of purchases, continuing the long-term positive demand trend for gold."

Adrian Ash, head of research at Bullion Vault, the world's largest online gold investment platform, emphasized in a commentary this week: "Global central banks' demand for gold has surged over the past five years. According to official data, one ounce of every 10 ounces of newly mined gold is purchased by global central banks. Whether from a fundamental perspective or from a broader market sentiment perspective, the seemingly endless demand for gold by global central banks has become increasingly important to gold's potential bull market." Paul Wong, market strategist at asset management firm Sprott Asset Management, even said that the continued purchase of gold by global central banks "has reached or is close to reaching the level of exhausting the 'free floating inventory' of tradable gold."

Torsten Slok, chief economist at Apollo Global Management, added that the central bank's continued purchase of gold, which has helped push gold prices higher, is also due to concerns about the US fiscal situation. Based on this concern, they diversify the risks of holding US Treasuries by purchasing gold.

The deeper reason, said Brien Lundin, editor of Gold Newsletter, is that after the Russian-Ukrainian conflict, the United States and its allies imposed sanctions on Russia and weaponized the dollar, causing "central banks to try to protect themselves by transferring reserve assets from the dollar to gold." He said that as a result, 2022 was a record year for global central banks to buy gold, with official purchases accounting for about one-third of the gold production that year. However, in recent months, central bank purchases seem to have slowed down.

It is also worth mentioning that in addition to the central banks of Eastern countries such as China, India, and Turkey, which traditionally prefer gold, the Central Bank of Poland has gradually become a major buyer. In the second quarter of this year, the Central Bank of Poland became the largest central bank gold buyer, purchasing 19 tons of gold for reserves, and the total gold reserves increased to 377.4 tons. In 2023, Poland also recorded the second largest gold buyer, purchasing 130 tons of gold throughout the year. Currently, gold accounts for about 14.7% of Poland's total reserves. Adam Glapiński, governor of the Central Bank of Poland, recently stated that the Central Bank of Poland will continue to increase its gold reserves, with the goal of holding at least 20% of its reserves in the form of gold. "This makes Poland a more credible country, we are higher in all ratings, we are a very serious partner, and we will continue to buy gold. Our dream is to reach 20%." He said.

The Polish central bank announced plans to expand the country's gold reserves by 100 tons as early as 2021, and achieved this goal in September last year. When announcing the plan, Glapinski said that for reasons of financial security and stability, and hinted that concerns about the stability of the US dollar were also one of the factors in the decision to increase gold reserves, "The Polish Central Bank must be prepared for the worst-case scenario, which is why we regard gold as particularly important in the foreign exchange management process. Gold will retain its value even when the global financial system loses power and destroys assets recorded in traditional electronic accounts. Gold also has no credit risk and will not depreciate due to any national economic policy."

Is there still room for growth?

Under such strong demand,Bank of AmericaAccording to a report released last week, gold prices have risen 22% year-to-date, even exceeding the 17% increase in the Nasdaq index over the same period. In terms of other assets, the S&P 500 index rose 15.4%, commodities as a whole rose only 1.9%, government bonds rose 0.6%, and the US dollar rose 0.2% so far this year, which is even worse than the trend of gold. Bank of America recommends that even if the price of gold is already high, investors should learn from global central banks and continue to buy gold. According to Bank of America data, gold has seen the largest inflow of funds in four weeks. The latest trading data from the Commodity Futures Trading Commission (CFTC) also showed that gold speculative positions are at a four-year high.

Bank of America analyzed that the Federal Reserve's interest rate cuts in the coming months may trigger a rebound in inflation next year, and physical assets such as gold have historically performed well during inflation. "The central bank is continuously buying gold, and investors should keep up." Bank of America emphasized that "gold is the only asset that has outperformed US technology stocks and is one of the assets with the lowest correlation with stocks among all asset classes. As the downside risks of the US stock market continue to increase, gold may usher in more investor inflows." In addition to buying gold directly, Bank of America also said that gold ETFs are also good purchase targets, such as iShares Gold Trust Micro and SPDR Gold MiniShares Trust.

At the same time, Wall Street as a whole is optimistic about the future trend of gold prices, and some analysts even expect that gold prices will surge to $3,000 per ounce in this round of trading.

UBSIn an email to reporters on Monday, the Office of the Chief Investment Officer (CIO) of Wealth Management said: "Gold has hit new highs this year and outperformed major stock indexes, reaching our September 2024 target price of $2,500/ounce earlier than expected. But we believe that the rise in gold prices is not over yet, and there is still further room for upside in the next 6 to 12 months. The target price is expected to be $2,600/ounce at the end of the year and will rise further to $2,700/ounce by the middle of next year. One factor supporting our forecast is that although the momentum will slow down from the record level in the first half of this year, we expect central bank buying to continue until 2025. Due to the low proportion of gold in overall foreign exchange reserves, coupled with the trend of de-dollarization, we expect global central banks to buy 900-950 metric tons of gold this year." Another factor is that gold ETFs have seen net inflows for the first time since April 2022. Traditionally, ETF fund flows are negatively correlated with interest rate trends, that is, when U.S. Treasury yields fall, gold demand (through ETFs) will rise. With the Federal Reserve expected to start cutting interest rates in September, UBS expects more ETFs to see inflows.

Bart Melek, head of global commodity strategy at TD Securities, predicted last Friday that gold prices could reach $2,700 in the next few quarters. Patrick Yip, senior director of business development at the American Precious Metals Exchange, predicts that as global central banks buy more gold, geopolitical uncertainties continue, and many central banks around the world start a cycle of interest rate cuts, gold prices could rise to $3,000 as early as next year.

Financial commentator Kimberley Koenig told the First Financial reporter that in times of high inflation and economic uncertainty, in addition to gold, gold stocks and gold ETFs should also occupy an important position in investors' asset allocation. He said that recently, AI concept stocks have diverged, but gold stocks and gold ETFs have rebounded since March 1, with gold ETFs rising from 19% to 41%, and are generally in a buying range. Among them, he is most optimistic about the S&P Gold Stock ETF (GLD), as well as other ETFs that track a variety of precious metals including gold, such as the U.S. Global Gold and Precious Metals (GOAU), and theGold MiningHe believes that gold ETFs that invest in stocks, such as iShares MSCI Global Gold Miners (RING), are also worth investing in.