Although rising interest rates will continue to create a challenging environment for the gold market, analysts at Societe Generale see some potential for the yellow metal as an important diversifier for central banks.
The French bank mainly refers to non-OECD central banks as some countries seek to diversify their assets without the US dollar.
The US dollar's role as the world's reserve currency has been in focus since the outbreak of the conflict in Ukraine. The US and Western allies have imposed severe economic sanctions on Russia, using the US dollar as a weapon.
Analysts believe that central banks in developed Western nations already have substantial gold reserves. For example, Banco de Portugal's gold holdings account for more than 72% of its foreign reserves.
By contrast, central banks of emerging markets hold about 3% of their reserve assets in gold. Analysts at Societe Generale recommend that 5% of the portfolio should be allocated to gold.
If their reasoning proves to be right, and non-OECD central banks increase their gold holdings by 5%, that would represent 475 tons of gold, or 13% of gold production in 2021.
SocGen appears to be relatively neutral on gold in the short term, noting that aggressive rate hikes by the US Federal Reserve are pushing real interest rates higher. At the same time, rising inflation serves as a positive factor for the precious metal.