Central bank buying will drive gold over $2100 next year – TD Securities’ Melek

Sustained and robust gold purchases made by central banks provided a firm floor for gold prices during the recent downtrend, and they will be the key driver that pushes the precious metal to new all-time highs in the new year, according to Bart Melek, Head of Commodity Strategy at TD Securities.

“Central bank buying is likely why the recent higher interest rate-driven gold selloff, did not go through key supports slightly above $1,800/oz,” Melek wrote in the latest commentary from TD Securities. “The yellow metal managed to post a modest recovery in recent days as the Fed continued to signal higher rates for longer in its FOMC minutes and rates remained high across the yield curve. We believe the official sector will continue to be supportive in the months to come and should be a catalyst for our $2,100/oz projection next year.”

Melek said these physical purchases by central banks will be very important after the Fed pivot, which “should remove the high cost of carry” as a major obstacle to discretionary traders. “The US central bank should pivot even as inflation is above target,” he said. “The market will need to see signs that the economy is weakening materially, before this occurs.”

He also noted that even though China’s central bank has been buying steadily and in large quantities, the 4% that gold represents of its $3.115 trillion in reserves remains very low.

“PBoC’s reserve is much, much smaller than its geopolitical competitors,” Melek wrote. “The US holds some 69% of its FX reserve in the form of gold, Germany 68%, Russian Federation 25%. If Beijing increased the yellow metal’s FX reserve to just 10%, it would be in the market to buy over an additional 3,000t.”

Melek said he expects central banks’ appetite for the precious metal to remain very healthy for years to come. “Given that the recently published 2023 World Gold Council survey showed that 24% of central banks intend to increase their holding reserves in the next 12 months, we are confident in saying that central bank gold demand will be strong over the next few years,” he wrote. “Central banks’ views that the future role of the US dollar will be diminished in the years to come will be a big driver of gold demand in the future, as has been outlined in the survey which shows an increase in this attitude from earlier surveys.”

The same survey showed that central banks believe gold’s reserve status will grow as the greenback’s position wanes, he said. “Some 62% of the monetary institutions are saying that the yellow metal will have a greater share of total reserves compared to just 46% last year,” Melek said. “This means potentially higher demand from the official sector in the years to come. Last year, this group purchased a record 1,136t. So far this year to July, according to the IMF they have officially purchased some 224t.”

Melek said that TD Securities estimates that by September, the number totaled around 353t, which would indicate a prorated total of around 470t for 2023.

“Considering that unreported official purchases, which include non central-bank buying activity, have reportedly contributed more than 50% of purchases over the last year, the total tonnage of gold purchases by the official sector may well be significantly higher.”