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Bank of America is eyeballing $3,000 gold.

According to a report released by the big bank, gold prices could potentially hit $3,000 an ounce in the next 12 to 18 months as the Federal Reserve begins cutting interest rates and rising debt drives economic uncertainty. 

BofA commodity strategist Michael Widmer said he thinks the next bull run will be contingent on a pickup in investment demand.

“If non-commercial demand picks up from current levels on the back of the Fed rate cut, the yellow metal could push higher again.”

Widmer said this will likely happen when there is more certainty about Federal Reserve rate cuts. He said a pickup in ETF inflows and increasing LBMA clearing volumes are signs to look for.

ETF inflows globally were positive for the first time in 12 months in May.

The Bank of America report said central bank gold buying will remain a crucial factor supporting gold prices. 

Last year, central banks added a net 1,037 tons of gold to their reserves, just slightly below the record of 1,082 tons in the previous year.

According to the most recent World Gold Council Central Bank Gold Survey, that appetite for gold isn’t waning. Twenty-nine percent of central banks indicated they plan to add more gold to their reserves in the next 12 months. The WGC said it was the highest level since the survey began in 2018.

Widmer noted that de-dollarization is driving this central bank gold-buying spree, especially in China. 

“While the motivation of individual central banks for owning gold may vary, many reserve portfolios have one thing in common: the share of USD has been declining, while gold holdings have risen.”

The People’s Bank of China has added around 8 million ounces of gold to its reserves since January 2023. Meanwhile, the Chinese central bank has divested $102 billion in U.S. Treasuries in the past year.

The Bank of America report highlighted bond yield volatility as another tailwind for gold.

Widmer pointed out that the U.S. Treasury is flooding the market with bonds as borrowing surges with the ever-widening deficits, and the market is having a hard time absorbing all of the Treasuries. Widmer said the bond market is “one shock away from not functioning seamlessly.”

“Increased macro uncertainty today may pose an even greater threat to market stability in a context where growth in government debt has vastly overwhelmed the intermediation capacity of the market."

If demand for Treasuries continues to ebb, yields could rise even with Federal Reserve rate cuts. Higher yields typically create headwinds for gold since it is a non-yielding asset. Widmer said gold prices would likely fall initially with rising bond yields, but “the search for a ‘safe-haven’ asset will ultimately divert flows into the gold market, so the yellow metal will then likely pick up.”

“The long-standing inverse relationship between gold and rates has become more tenuous already and, in our view, this is unlikely to change going forward.”

The question is when will the Federal Reserve cut rates. Sentiment shifts back and forth with every fluctuation in CPI and economic data. But it seems like the central bank will cut rates sooner rather than later in order to ease pressure on the economy. 

The Fed faces an ugly reality – this economy can’t function in a higher interest rate environment. While the central bank hasn’t done enough to slay price inflation, it has driven rates high enough to wreck a bubble economy blown up by easy money. The economy feeds on inflation.

Rate hikes have already kicked off a financial crisis that continues to bubble under the surface. It’s only a matter of time before something breaks in the economy. At that point, the Fed will likely cut rates rapidly to zero and launch new rounds of quantitative easing. That means more price inflation and the perfect environment for gold to run even higher.

The Bank of America report doesn’t even consider this scenario, and yet it still makes a strong case for $3,000 gold. 

The bottom line is that while the gold price has been treading water in recent weeks, there are still plenty of reasons to be bullish on the yellow metal. 

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