In his latest commentary, Melek explains that central bank buying likely prevented a significant gold selloff despite the recent higher interest rates. The yellow metal managed to recover modestly as the Federal Reserve indicated a prolongation of higher rates in its FOMC minutes, and interest rates remained elevated across the yield curve. TD Securities projects a price target of $2,100/oz for gold next year, with the official sector’s continued support playing a vital role in achieving this projection.

Melek emphasizes the importance of physical gold purchases by central banks following the Federal Reserve’s anticipated pivot, as it is expected to remove the high cost of carry as a major obstacle for discretionary traders. He believes that the US central bank will pivot even with inflation above target, but the market will require clear signs of significant economic weakening before this occurs.

Regarding China’s central bank, Melek notes that while it has been steadily purchasing gold in substantial quantities, the yellow metal’s representation of only 4% of its $3.115 trillion in reserves remains relatively low. Comparatively, the US holds around 69% of its foreign exchange reserve in gold, Germany holds 68%, and Russia holds 25%. If China were to increase its gold reserves to just 10%, it could potentially buy an additional 3,000 tons of gold.

Melek believes that central banks’ appetite for gold will remain robust for years to come. He cites the World Gold Council’s 2023 survey, which revealed that 24% of central banks intend to increase their gold holdings in the next 12 months. This indicates strong demand from the official sector in the coming years. The survey also showed that central banks view gold’s reserve status as growing while the dominance of the US dollar diminishes. Melek points out that 62% of monetary institutions believe that gold will have a greater share of total reserves, compared to 46% last year, potentially driving higher demand from the official sector. In 2022, central banks purchased a record 1,136 tons, and as of July, they have officially purchased around 224 tons.

TD Securities estimates that by September, the total would reach approximately 353 tons, indicating a prorated total of around 470 tons for 2023. Melek highlights that unreported official purchases, including non-central bank buying, have accounted for more than 50% of gold purchases over the past year, suggesting that the actual tonnage of gold purchased by the official sector could be significantly higher.

Overall, TD Securities expects central bank gold purchases to have a substantial impact on driving gold prices higher in the coming years, with the official sector playing a pivotal role in shaping the future of the precious metal.