QNB Expects Gold Prices to Remain Supported by Easing Monetary Policy

Qatar National Bank

Qatar National Bank (QNB) said that it expects gold prices to receive further support due to major central banks monetary easing, the depreciation of the U.S. dollar, and geopolitical conflicts.

The weekly report from QNB said that, despite the rapid global decline in inflation and significant gains in gold over recent years, conditions globally remain favorable for the precious metal. The report highlighted the debate surrounding gold's role in investment portfolios. On one hand, supporters emphasize its importance as a key diversification tool that serves as a safe haven against inflation and international conflicts. On the other, critics view gold as a relic of a past era, a non-yielding asset with limited utility and intrinsic value.

QNB's report asserted that there is no doubt gold has been a substantial enhancer for diversified global investment portfolios in recent years, with its price reaching an all-time high of $2,615 per ounce for several months. Since the COVID-19 pandemic, gold has outperformed most major assets, including global equities, government bonds, and commodities, positioning itself recently as a hedge against inflation.

The report explained that following the pandemic, monetary authorities in advanced economies faced significant challenges due to rising inflation, raising concerns over the rapid decline in the real value of money, as more currency units are needed to purchase the same basket of goods and services.

QNB pointed out that the long-held belief in gold as an effective hedge against inflationary pressures also raises questions about its ability to continue performing well in the medium term and whether the metal's prices might soon correct or enter a period of weak performance.

The report attributed gold's continued positive performance in the medium term to three key factors: first, the current monetary policy trends in the United States and Europe are supportive of gold prices.
The report noted that in recent years, cash or short-term government securities have provided high nominal yields, increasing the opportunity cost of holding gold. While nominal yields remain significantly higher than pre-pandemic levels in most advanced economies, this dynamic is expected to shift substantially over the next 24 months. The U.S. Federal Reserve and the European Central Bank could lower interest rates by 250 and 150 basis points respectively, making cash and short-term government securities less attractive as investment options, thereby favoring alternative investments like gold.

The second factor, according to the report, is the historical role of foreign exchange rate movements in supporting gold prices, as gold prices are negatively correlated with the U.S. dollar; gold prices rise when the dollar falls and vice versa. An assessment of the U.S. dollar suggests it is overvalued by about 9%, indicating a major adjustment may be required. A weaker dollar boosts the purchasing power of other countries for dollar-denominated goods like gold, enhancing overall demand and supporting prices.

The third factor addressed in the report is the persistent global geopolitical uncertainty, such as the Russia-Ukraine conflict, ongoing conflicts in the Middle East, and rising tensions between the U.S. and China in the Pacific. These factors may add risk premiums to traditional assets, prompting investors to seek alternative safe-haven tools. It noted that golds appeal has also been bolstered by long-term trends, including the intensification of economic rivalry between East and West, diminishing international cooperation, rising trade conflicts, increased political polarization, and the "weaponization" of economic relations through sanctions.

The report concluded by saying that, in an era of growing geopolitical instability, golds role as a tangible, jurisdiction-neutral asset has become increasingly important, and it can be used as collateral in various markets. Amid these developments, central banks globally have been accumulating gold at an unprecedented rate for generations, which supports steady institutional demand for gold in the long term.

(QNA)