ANZ sees gold at $5,800: rate cuts, global debt to fuel demand

Gold has failed to defend the $5,000-per-ounce level as easing geopolitical tensions and a stronger dollar weighed on sentiments. 

Yet, the stabilisation in prices around the $5,000 mark is not expected to be permanent, according to analysts at ANZ bank.

The bank has scaled up its projections for gold prices for the second quarter, according to a Kitco report. 

ANZ commodity analysts have significantly raised their gold price forecast for the second quarter, now projecting it to reach $5,800 an ounce. 

ANZ significantly raises gold price forecast

This represents a sharp increase from their previous target of $5,400 an ounce, as stated in their most recent note on the commodity.

“Although recent volatility has raised questions about whether gold prices have peaked, we believe the rally is not yet mature enough to reverse anytime soon,” the analysts said.

The recent sharp decline in gold prices from last month's near $5,600 record highs has raised concerns among some investors.

They fear that this drop could signal a steep price collapse, mirroring what occurred after the market peaks in 1980 and 2011.

ANZ pointed out that current market conditions are distinct, providing strong support for gold. 

Distinct market conditions bolster gold's appeal

This is primarily due to the expectation that the Federal Reserve will implement at least two interest rate cuts this year.

Furthermore, receding inflation pressures have led markets to anticipate a potential third rate reduction by December.

Market participants are currently anticipating the release of the Federal Reserve's January meeting minutes on Wednesday, seeking more information on the future direction of monetary policy. 

According to the CME's FedWatch Tool, the prevailing expectation is that the first interest rate reduction will occur in June.

Bullion, which offers no yield, typically performs well when interest rates are low.

The COMEX gold contract was last at $4,971.61 per ounce, down 0.9%, while silver was 1.8% lower at $75.155 an ounce. 

The Australian bank views gold as the premier "ultimate insurance policy" against mounting uncertainty in global financial markets, extending beyond concerns about US monetary policy.

According to analysts, gold's appeal as a defensive asset is rising, particularly as the attractiveness of US Treasuries diminishes. 

This shift is not confined to the US; increasing global debt levels are making bonds worldwide, including Japanese government bonds, less desirable to investors.

Gold ultimate insurance policy and driver of ETF demand

“The global financial system is undergoing a structural shift. The US Treasury, once regarded as the world’s largest risk-free asset and the foundation for interest-bearing and tradable instruments, is facing trust issues. Soaring debt levels, concerns about the Fed’s independence, and increasing risks of sanctions have fundamentally altered its status.

As a result, investors are demanding higher premiums for long-dated US Treasuries, which is evident from the widening spread between long and short-term yields,” the analysts said.

ANZ further anticipates that broad investment will be the primary driver for the gold market this year, despite forecasting continued strong demand from central banks through 2026.

Even with prices rising, analysts highlighted substantial upside potential, encouraging investors to shift funds into gold-backed exchange-traded funds.

Analysts predict a continued rise in gold-backed ETF inflows this year, potentially pushing total holdings beyond 4,800 tonnes. 

While Western markets remain the primary driver of this demand, significant expansion is anticipated from emerging markets, notably China and India. These regions have the potential to increase their share of global ETF holdings beyond the current 10%, the analysts stated.

“The upside risk to our view is any fund rotation from equities and bonds to gold, if geopolitical or political risks worsen,” they added.

Despite remaining bullish on silver, ANZ analysts believe its inherent volatility will likely prevent it from surpassing gold's performance this year.

“Silver’s performance will remain anchored to the gold price; strong investment demand leaves upside room for prices,” the analysts said.

“That said, silver’s outperformance looks like it is ending, as industrial demand starts to respond to higher prices and investors become cautious. The trading range for silver will likely be wider.”