After a sharp drop in June, the gold market is entering a stage closely monitored by investors as supporting and pressing factors continue to intertwine. While expectations that the US Federal Reserve (Fed) maintains a cautious monetary policy remain a short-term obstacle, Schroders believes that central banks' gold buying demand may continue to lay the foundation for the long-term outlook for the precious metal.
In the latest gold outlook report, Schroders assessed that market developments in the past time showed differences between investor groups. According to this organization, when gold prices adjusted in June, a part of Western investors tended to reduce their holdings due to concerns that the Fed would continue to maintain high interest rates. Conversely, many central banks in emerging economies continue to increase gold reserves with the goal of diversifying long-term reserve assets.
Schroders believes that pressure on gold prices currently mainly comes from expectations about US monetary policy. However, the organization assesses that the market may need about 3-6 months to absorb adverse factors before forming a more stable price level, if expectations of the Fed continuing to raise interest rates gradually cool down.
According to Schroders' analysis, inflationary pressure from energy prices has shown signs of decreasing compared to before, while long-term inflation expectations have also decreased. In addition, indicators on the US labor market have not shown a uniform trend, making the room for the Fed to continue to maintain overly tight monetary policy more unpredictable.
The report also noted that the US fiscal context may be a factor to monitor in the coming time. According to Schroders, the need to issue large-scale bonds to roll over debts and offset budget deficits may put more pressure on US government borrowing costs, thereby affecting the space for monetary policy management.
On the supporting side, Schroders assessed that buying power from central banks is still one of the notable factors of the gold market. The organization said that the People's Bank of China (PBOC) continued to maintain gold buying activities in the past, even when gold prices were still high.
According to Schroders, the amount of gold China announced to buy has increased significantly in recent months. The organization believes that continuing to supplement reserves in the context of gold prices maintaining at a high level shows that Beijing still considers gold a strategic asset in its foreign exchange reserve structure.
Schroders also noted that the proportion of gold in China's total foreign exchange reserves is still significantly lower than many other economies. This means that the country's gold buying demand still has room in the long term if it continues to implement its reserve diversification strategy.
Besides China, recent surveys by the World Gold Council (WGC) and the Forum of Official Monetary and Financial Institutions (OMFIF) also show that many central banks continue to plan to increase the proportion of gold in foreign exchange reserves in the coming years.
According to Schroders, in the short term, gold price movements will still be affected by the Fed's monetary policy expectations and US economic data. However, in the long term, stable gold buying demand from the central bank sector is considered one of the important factors continuing to support the market.
*Note: This is Schroders' analysis, not considered a gold buying or selling recommendation.
