Gold price forecast as central banks’ accumulation is the most rapid since 1960

Gold was at the center of attention during the COVID-19 pandemic and the years that followed. Because central banks and governments worldwide rushed to support their economies via quantitative easing or fiscal programs, the money supply expanded at unprecedented rates.

As a result, inflation soared in all economies.

Gold has been traditionally viewed as a hedge against inflation. So it was only natural for investors to turn their attention to gold and anticipate the rise in inflation.

But to their disappointment, the price of gold did not act as they expected. In fact, a quick look at the larger timeframes reveals the fact that the gold price is in a long-term consolidation.

However, the consolidation takes place near all-time highs. Shorting an asset when trading close to all-time highs is a contrarian (and risky) bet.

That is particularly true when reading statistics saying that central banks are buying gold at the most rapid pace since the 1960s.

Why do central banks buy gold?

For a variety of reasons.

First, gold offers portfolio diversification even for central banks. For example, gold is a way to reduce dependence on USD holdings.

Second, holding gold does not bring any credit risk. More precisely, there is no counterparty risk in holding gold.

Third, gold can be used as emergency funding in times of need (e.g., war).

Is a bullish breakout imminent?

Technical traders look at larger timeframes to eliminate the market “noise.” Gold, like any other US dollar-denominated asset, reacts to economic data, which is released constantly.

Hence, the smaller timeframes may be difficult to interpret, and a better way to understand the gold market is to look at the bigger picture.

The weekly chart is the perfect timeframe for that. It shows that the price of gold was $250 in 2001 and exceeded $1750 ten years later.

But the most striking thing that this chart reveals is the similarity between the current consolidation area and the one between 2008-2010. Those were too troubled years, as the world faced the Great Financial Crisis.

What followed was a bullish breakout, a rally of almost $1000.

Therefore, as long as gold trades near the highs, the path of least resistance remains the upside.