Gold price could smash records at $2,000, says Citi

By Henry Sanderson | September 10, 2019

The price of gold could hit a record high of $2,000 an ounce within the next two years as US economic growth fades and the Federal Reserve cuts interest rates, according to analysts at Citigroup.

The New York-based bank said in a Monday research note that the precious metal could top levels last seen eight years ago, when gold surged to $1,900 an ounce, as uncertainty over the 2020 presidential election combines with a sputtering domestic economy.

Investors around the world have been drawn to gold at a time of negative bond yields, which have increased the appeal of yieldless assets such as gold. Around $15.3tn of bonds are trading at levels that guarantee buyers a loss, if the bonds are held to maturity. The gold price has risen by 17 per cent this year to trade at $1,495 a troy ounce, putting the precious metal on track for its best year since 2010.

Citi said a combination of lower rates, growing risks of a global downturn, and strong demand among central banks could push prices higher still. Central banks are buying more gold this year than any year in the past nine, according to the World Gold Council.

“We expect spot gold prices to trade stronger for longer . . . posting new cyclical highs at some point in the next year or two,” strategists including Aakash Doshi said in Citi’s note.

Big foreign-exchange holders such as China, which has $3.1tn in reserves, have been keen to diversify their portfolios to limit exposure to the US dollar. China’s central bank has bought $4.8bn worth of gold over the past nine months.

“It does seem that gold’s status within the portfolio has been reignited,” said Suki Cooper, an analyst at Standard Chartered in New York.

The People’s Bank of China increased its holdings of gold to 62.45m ounces in August, from 59.24m in November, according to a weekend notice on its website. That takes the bank’s total gold holdings to around $94bn at current prices.

Last year, central banks bought the most gold in 50 years, led by Russia, whose holdings of gold are now worth around $100bn.

Alistair Hewitt, a director at the World Gold Council, said that central banks across emerging markets are attracted by the liquidity of the gold market and its lack of default risk. Countries such as Russia have also adopted a clear policy of “de-dollarisation,” he said.

China is the world’s biggest producer and consumer of gold, but the precious metal makes up just 2.7 per cent of its official reserves, which are worth more than $3tn.

“Their FX reserves are so large [diversification is] going to take decades and decades,” said Bernard Dahdah, a commodities analyst at Natixis.

The precise composition of China’s foreign exchange reserves is a state secret, but officials have previously said that the currency mix is broadly in line with the composition of global reserves as indicated by IMF data collected from member countries. US dollar assets comprised 64 per cent of allocated reserves by the end of 2016, according to the latest data.

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