It won’t take much to drive gold to $2,500 this year. That is according to a Bank of America commodities market strategist in a recent memo.
It is not a difficult forecast to make with gold having moved up more than 20% in the last six months, even in the face of serial interest rate hikes.
Now the Federal Reserve’s interest rate hiking cycle appears to be nearing its end, the BoA strategist says. The long-term view: “Central banks have no silver bullet for fighting inflation, and this should ultimately bring investors back to the market. The end of the hiking cycle will be critical for the yellow metal.”
As central banks continue to move assets out of dollars and continue to add gold to their reserves, the analysis also points, as we have many times, to de-dollarization.
De-Dollarization and Gold
“Outright de-dollarization is mentioned by only a handful of central banks,” notes the strategist. “Yet the global economy is now moving towards a multi-polar world, reflected, for instance, in reports that Saudi Arabia is considering quoting oil in CNY [Chinese yuan]. And the US currency in official foreign exchange reserves has fallen from around 70% two decades ago to 58% at present.”
“Russia’s experience and those of its peer nations over the weaponization of the US dollar has incentivized central banks to shift some of their assets into gold,” the memo explained.
Others are increasingly taking note of US foreign policy working at cross-purposes to the dollar’s special privilege. In a recent Bloomberg article, economic historian Niall Ferguson writes, “If the US intends to preserve its global monetary dominance, it is concealing that intention very well.”
Even Elon Musk took note of these crossed wires in a recent tweet:
Meanwhile, BofA’s popular Chief Investment Strategist, Michael Harnett, has also turned bullish on gold and predicts a 20% sell-off in the value of the dollar. As illustrated in the following chart, Harnett says the dollar has entered its fourth bear market in the last fifty years, and that means higher gold.
Harnett’s reasoning is based on a number of converging factors that include the skyrocketing US budget deficit, the US banking crisis that makes the dollar a less attractive safe haven (specifically China and Japan reducing their dollar holdings), and more generally the de-dollarization described above.
“The oldest and most traditional of assets, gold, is now a vehicle of central bank revolt against the dollar. Often in the past, both the dollar and gold have been seen as havens, but now gold is seen as much safer,” writes Ruchir Sharma, a fund manager and Financial Times columnist.
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