Gold Prices Hold Near Record Highs Amid Increased Safe Haven Demand
Physical Demand Expected to Drive Further Gains
Gold prices continued to trade near record highs on Wednesday, buoyed by increased safe haven demand following a devastating earthquake in Taiwan. However, BofA Securities anticipates that it will be physical demand that propels further gains in the precious metal.
Current Market Situation
As of 04:50 ET (09:50 GMT), gold was priced at $2,271.60 per ounce, hovering close to its record high of $2,288.43 reached the previous day. Meanwhile, gold futures expiring in June were trading at $2,292.05 per ounce, just shy of their all-time highs of $2,308.85 per ounce.
Impact of Recent Events
The earthquake in Taiwan dealt a blow to risk appetite, causing significant damage to the country’s infrastructure and top chipmaking factories. The aftermath also led to tsunami warnings in parts of Japan, further increasing the appeal of gold as a safe haven asset.
Role of Physical Demand
While geopolitical events have influenced the recent surge in gold prices, BofA Securities highlights the importance of physical demand, particularly from central banks. China, in particular, has been actively increasing its gold reserves, driving up jewellery sales and non-monetary gold imports to record levels.
Market Trends
Despite strong physical demand, the traditional relationship between gold prices and physically backed ETFs has weakened, with a decline in assets under management in these vehicles. Investment advisors have been liquidating holdings, while institutional positions in futures remain subdued.
Shift Towards Options
Traders have shown a preference for options over traditional investments, with risk reversals and low delta options gaining popularity. This shift is largely influenced by uncertainty surrounding monetary policy, but could reverse if the Federal Reserve decides to cut rates, attracting investors back to the market.
Future Price Estimates
BofA Securities previously projected a price target of $2,400 per ounce if the Fed were to cut rates in the first quarter of 2024. Despite potential rate cuts being delayed, the firm maintains this estimate for the current year, anticipating further upside in gold prices.
