Gold Prices May Rise on Central Bank Demand, Inflation Concerns

Morgan Stanley's metals and mining strategist Amy Gower believes that despite gold's recent decline, there are three forces that could support a comeback. The precious metal has dropped 10% in six months due to rising Treasury yields and renewed expectations for Federal Reserve interest rate hikes.

The first force is persistent demand from central banks and China, which reported net purchases of 23 metric tons of gold in July, according to the World Gold Council. China's appetite extends beyond its central bank, with Chinese gold ETFs recording inflows of about 5 billion yuan ($744 million) in July.

The second factor is growing concern about government finances and long-term debt levels around the world. Gower suggests that if stress in long-dated bond markets eventually prompts policy intervention or sends yields lower, the relationship between higher government bond yields and gold could change.

The third potential catalyst is inflation, particularly through energy prices. If diplomatic efforts lead to a meaningful de-escalation and oil prices fall, inflation expectations could ease, reducing pressure on the Fed to keep raising interest rates. Gower sees $4,000 an ounce as 'quite a strong floor' for gold.