According to an analysis by Deutsche Bank, gold retains significant potential for further appreciation as central banks globally continue to increase the metal's share in their reserve assets.
In a report released on Monday, strategist Mallika Sachdeva pointed out that as monetary policymakers seek tools to hedge against geopolitical turmoil, gold's proportion in global central bank reserves has risen from around 10% in the 1990s to 30% today. Concurrently, the US dollar's share in foreign central bank reserves has declined from over 60% to 40%.
Sachdeva stated, "The gap between the reserve share of the US dollar and gold is now just 10 percentage points, which is extremely noteworthy."
The London-based strategist believes that central banks appear to be reversing the trend of the 1990s, when they shifted asset allocations from gold toward the US dollar.
Sachdeva also acknowledged that approximately 80% of the increase in gold's share of central bank reserves is attributable to the rise in gold prices themselves, rather than new purchases. Last year, gold recorded its strongest annual gain since 1979, ironically the year of the Iranian Revolution. Over the past 12 months, the price of gold has increased by more than 40%.
However, Sachdeva noted that central bank purchasing activity still accounts for a significant portion of the growth in reserve holdings, and it is often central bank buying that drives gold prices higher. She stated, "Therefore, there is an endogenous relationship between purchase volumes and price, with both factors jointly driving the increase in gold's share."
Gold has long been viewed by investors as a safe-haven asset during periods of global conflict. Since 2022, this characteristic has continuously drawn investors to gold—first due to the Russia-Ukraine conflict, and subsequently due to strikes by the US and Israel against Iran.
The strategist indicated that the future direction of gold prices depends partly on how much gold and US dollars central banks in emerging economies ultimately decide to hold. An analysis of International Monetary Fund (IMF) data by Deutsche Bank shows that all gold purchases by central banks since the global financial crisis have originated from emerging market central banks.
Sachdeva further stated that even if the total foreign exchange reserves of emerging markets were to decline to $5 trillion, if they set a target of 40% for their gold reserve ratio, the price of gold could reach $8,000 per ounce within the next five years. This level would represent an increase of approximately 70% from the current gold price.
Comments