(Kitco News)—Bank of America remains bullish on gold and maintains its forecast for prices to reach $3,000 an ounce; however, the bank also acknowledged that this target could be just another marker that falls by the wayside within a much bigger rally.

The gold market has seen a strong start to the year, with prices rallying to new record highs above $2,900 an ounce, up roughly 11% year-to-date.

“So far, gold has rallied mostly on the back of exceptional purchases by the official sector,” said Michael Widmer, Commodity Strategist at Bank of America, in his latest research report. “Worried about the US fiscal deficit, trade disputes, wars, sanctions, and asset freezes, central banks and other investors have pushed spot gold prices to a record.”

Looking ahead, Widmer explained that as central bank gold purchases dominate the marketplace, global investment demand has to increase by only 1% for the precious metal to hit the bank’s target.

At the same time, Widmer noted that a 10% increase in investment demand would drive prices to $3,500 an ounce.

“That’s a lot, but not impossible,” he said.

Widmer explained that China remains a critical market to watch over the coming months. Last week, Chinese authorities launched a new pilot project that would allow Chinese insurance companies to invest up to 1% of their assets in gold.

“Our China insurance team estimates that China’s insurers have invested a total of RMB32bn, or $4.4bn, so in keeping with the pilot’s outline (investment in gold shall not exceed 1% of the company’s total assets at the end of the previous quarter), the potential inflows into gold could be in the region of RMB180-200bn, or $25-28bn,” Widmer said in the note. “Putting concrete numbers behind this, the purchases could generate around 300 tonnes of gold purchases or 6.5% of the annual physical market. Hence, this initiative could go a long way in carrying over last year’s support from physical investment.”

However, Bank of America also noted that the Chinese market is just one pillar in a dynamic and evolving global gold market. Widmer explained that gold’s linear price action highlights its bullish potential, and this sentiment is also reflected in the derivatives and over-the-counter markets, as demand has significantly disrupted the global supply chain.

Widmer pointed out that the gold market can be extremely complex, as contracts and agreements are made between investors that incorporate physical bullion, futures contracts, and even leased gold.

“Exchange for physicals (EFP), which trade both spot and future dates, have grown popular with banks and funds. In these transactions, a market participant takes a long (or short) position in the future and an offsetting short (or long) position in physical gold, a potentially profitable transaction that effectively takes a view on the spread between the two prices,” said Widmer.

Chaos has reigned in EFP markets as gold futures listed on the CME trade duty-inclusive. Widmer noted that concerns over tariffs have pushed up prices in the futures market. Investors have been moving gold and silver into the U.S. in anticipation of President Donald Trump’s threats to impose 25% tariffs on imports from Canada and Mexico.

Specifically, U.S. production only meets 17% of total domestic demand for silver. Ten percent of America’s silver comes from Canada, and the rest comes from Mexico.

The U.S. also imports significant amounts of gold to meet domestic demand.

“When President Trump took office and discussions around the implementation of tariffs gathered steam, EFPs became an issue. Indeed, the physical spot leg and the lease rates were priced in London, but the futures leg was priced on CME in New York, whose contract trades inclusive of duties,” Widmer said. “There were then concerns that trade restrictions would sustainably lift futures prices while also making shipping gold into the U.S. more expensive. Hence, banks started to send gold ounces to New York pre-emptively, with Exhibit 8 showing that inventories in CME warehouses have increased sharply in recent months.”

Meanwhile, as significant amounts of gold have been flowing to New York as bullion banks and investors try to insulate themselves from potentially higher tariffs, the London Over-the-Counter (OTC) market still needs to meet robust investment demand. The dramatic shift in the supply chain, coupled with consistent demand, has significantly increased lease rates for physical gold.

“Gold refineries are large users of borrowed gold. Typically, they must pay for feedstock shortly after it is delivered to the refinery, but they only get paid themselves when the gold has been refined, fabricated into bars or other forms, and sold,” said Widmer.

“When demand for refined products increases rapidly, refineries can decide to increase gold borrowing to fund their larger work in progress.”