BCA sees gold’s consolidation as the calm before the storm

In a recent commentary, commodity analysts at BCA Research reiterated their long-term bullish outlook for the precious metal. The Montreal-based research firm has been bullish on gold since November 2022.

Prices have room to move lower in the near term as bullish momentum wanes; however, Roukaya Ibrahim, Market Strategist at BCA and lead author of the latest commentary, said that she sees limited downside. So far, gold has managed to hold critical support at around $2,300 an ounce.

“Increased [emerging market] central bank appetite for gold is a structural phenomenon. It will remain a source of support, putting a floor beneath prices,” Ibrahim wrote.

While the gold market is seeing diverse demand from central banks worldwide, BCA continues to pay attention to China. Although the country didn’t purchase any gold in May, Ibrahim said that the People’s Bank of China will continue to build its gold reserves.

“The slowdown in the Chinese central bank’s gold purchases highlights that its demand is sensitive to high prices,” Ibrahim wrote. “Nevertheless, the increased PBoC appetite for gold represents a structural and multi-year shift in demand.

The motive behind the Chinese central bank’s increased appetite for gold remains intact. The US-China geopolitical rivalry will continue escalating in the coming years. China will continue seeking to reduce its vulnerability to the global systems where the US dominates.”

China remains a dominant force in the gold market because of its sheer size. After an 18-month shopping spree, the PBoC bought 316 tonnes of gold, increasing its gold holdings to 4.9% of total foreign reserves.

Ibrahim estimated that if China wanted to increase its gold reserves to 16% of total assets to compete with other developed economy central banks, it would need to purchase another 5.7 thousand tonnes of gold.

“That is more than the 4.4 thousand tonnes of total global gold demand in 2023,” she said.

If the PBoC wanted to spread its purchases out over the next five years, it would represent roughly a quarter of global consumption.

Meanwhile, Ibrahim also expects an impending shift in the Federal Reserve’s monetary policy to create some new momentum in gold in the second half of the year.

“The 10-year TIPS yield is currently near where it was at the start of the 2007 easing cycle. Back then, gold prices rallied in the three years following the first rate cut. Therefore, it is not unreasonable to expect some support for gold from the looming shift in monetary policy stance,” she said.

Finally, Ibrahim said that she expects slower economic growth will be another supportive factor for gold’s long-term potential.

“We assign high odds to a US recession starting over the coming 12 months. Commodity portfolios and global multi-asset portfolios should increase their exposure to precious metals – especially gold – on near-term dips,” Ibrahim wrote. “We expect that economic conditions in general, and the global industrial cycle in particular, will deteriorate towards end-2024/early-2025.”

Posted by :

Jack Dempsey, President

401 Gold Consultants LLC

jdemp2003@gmail.com