Additional supporting the gold worth are funding flows, which have been “very resilient,” based on BofA analyst and lead creator Michael Widmer.
Within the financial institution’s World Metals Weekly report, he mentioned gold had disconnected from its conventional drivers due to vital dislocations buried beneath headline inflation, rates of interest and foreign money strikes. These market forces raised the attraction for buyers to carry gold in a portfolio.
BofA expects the gold worth to common $1,925 per ounce in 2022.
Widmer mentioned inflation at 7% put the US Fed in a troublesome place however cautioned that tighter financial coverage won’t be the silver bullet to repair the issue.
“Whereas among the inflation is pushed by home components, others, together with provide chain dislocations, will not be; additionally, a mixture of short-term and extra persistent drivers are at play. We additionally word that the Fed’s response perform has modified.
“Gradual hikes, accompanied by declining inflation, regular financial development, and secure markets would be the superb state of affairs for US financial coverage, however this can be a troublesome path. The chance of a coverage mistake is excessive, and rising fairness volatility tends to help perceived secure havens, gold included,” mentioned Widmer.
The financial institution additionally noticed that coverage normalization contributed to an almost 50% drop in bitcoin and crypto belongings, which is one other issue probably supporting strong gold inflows. Furthermore, rising market international locations have been internet gold patrons lately, partially over considerations about how the shift away from ultra-lose financial coverage in DMs would impression their portfolios. Whereas EM central banks allocate 6% of their portfolio to the yellow steel, proudly owning round 12% would optimize the risk-return profile.
“So, EMs have vital scope for gold additions, significantly after the current crypto fiasco in El Salvador. Gold is a hedge for buyers and EM central banks alike. And this issues as international imbalances make a comeback, significantly when geopolitics are flaring up,” mentioned Widmer.
The financial institution famous these international imbalances as rising, as was the VIX.