Big Dedollarization Winner: Bank of America Places Gold at $3,000/Ounce | Financial markets

The expressions “geopolitical tensions” and “multipolar world” are becoming less and less strange in the jargon of economic reports. Another option that has come into fashion is dedollarization. The United States was the hegemonic power in the 20th century and still is in the 21st century, and its currency, the dollar, has played a critical role as the world’s reserve of value. Both the country itself and its currency still maintain their positions, but the growth…

The expressions “geopolitical tensions” and “multipolar world” are becoming less and less strange in the jargon of economic reports. Another option that has come into fashion is dedollarization. The United States was the hegemonic power in the 20th century and still is in the 21st century, and its currency, the dollar, has played a critical role as the world’s reserve of value. Both the country and its currency still hold their own, but the rise of China and the West’s split from Russia over its invasion of Ukraine are calling them into question. In a recent report, Bank of America experts identified a clear winner in the attempt to break the status quo we are witnessing: gold. According to the firm’s analysts, in 12-18 months the price of this precious metal could reach $3,000 per ounce.

By 2024, an ounce of gold is overvalued by 13%, bringing its price to about $2,332 this Monday. This comes in a year in which it set a new all-time high, hitting $2,425.31 an ounce on May 20. By comparison, if gold were a stock index, only three of the world’s major stock markets would outperform in 2024: Nasdaq (17.58%), Nikkei (15.96%) and S&P 500 (14.57%) . ). When valuing an ounce at $3,000, Bank of America gives it a 28% potential within a year and a half.

“We think gold could reach $3,000 an ounce over the next 12 to 18 months, even if current buying flows don’t justify those levels today. Reaching this level will require a further increase in demand, which requires the Federal Reserve to cut rates. More capital inflows into physical gold ETFs and a recovery in trading volumes in the London bullion market will be the first signals pointing towards these prices. An important role will also be played by the continuity of purchases by central banks, as well as the reduction in the weight of the dollar in foreign exchange portfolios,” Bank of America analysts write.

Experts say that to arrive at their estimate, they modeled the price based on a number of assumptions, including mining, supply from processing, and demand from industry and jewelry. “Since demand for gold and jewelry depends on metal prices, it is difficult to make an estimate without setting a forecast price. To do this, we asked how investor demand for gold would respond to different price levels. Non-commercial gold purchases rose 3% in the first quarter of 2024, enough to justify an average price of $2,200 an ounce. If these non-commercial purchases continue to increase, that’s when gold could reach $3,000 an ounce.”

What does gold have to do with dedollarization? This shutdown attempt by some countries appears to be playing a fundamental role in the behavior of the precious metal. Bank of America analysts first cite the latest research from the World Gold Council, which showed that central banks are looking to increase gold purchases. This metal has a long tradition of being considered a safe-haven value in times of inflation, crisis and uncertainty. Its alternative investment value also gives it another appeal, experts say. “The reasons why central banks hold gold directly are varied, but they have a common thread: among major buyers, the number of dollars in their reserves has decreased. Over the past 12 months, China has reduced its US bond holdings by $102 billion, while its gold reserves have grown by 8 million ounces since January 2023, equivalent to $51 billion,” they explain.

Among the reasons for this movement, Bank of America cites an attempt to redirect the redenomination of currencies in the reserves of countries seeking to change the status quo. “Recently there have been concerns about the dominance of the dollar and its health as a currency. This should lead to even more gold buying by central banks and increased investor interest. These concerns have also been expressed by our colleagues at Interest Rate Research, who believe that a debt crisis in the United States is not a base case, but represents a growing risk. The US debt market is one shock away from ceasing to function normally. If this happens, gold will initially fall due to an avalanche of liquidation of positions, but then rise again,” they write.

According to the IMF, international foreign exchange reserves in the hands of central banks around the world amounted to assets valued at a total of $12.33 trillion in the fourth quarter of 2023. Of this amount, 54.17% were dollars, that is, 6.68 trillion dollars. In the fourth quarter of 2022, total reserves were estimated at $11.96 trillion, of which 54.1% were dollars, $6.46 trillion. There is hardly any change from year to year, but if you look a little further back in time, you can see the dollars falling. In the fourth quarter of 2021, central banks held $7.01 trillion. Comparing this data with data from the World Gold Council, central banks increased the pace of gold purchases in the third quarter of 2022.

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