…Investment demand will drive gold prices to $2,700-3,000 per ounce by 2025
Citi is optimistic that gold investment demand will rise over the next 12 to 18 months to absorb all of mining supply, a new framework report shows.
This follows gold investment demand from China and central banks around the world, which rose to more than 85% of mine supply in the first quarter of 2024.
“Looking forward, we expect gold investment demand to grow enough to absorb almost all mine supply over the next 12 to 18 months, supporting our base case of a gold price of $2,700 to $3,000 per ounce in 2025,” Citi said in a research note titled “Fundamental Framework for Gold.”
The rise in investment demand and prices is due to expectations of a normalization of US interest rates, boosting demand in particular for exchange-traded funds (ETFs).
Citi's research also found that gold prices have significantly outperformed real interest rates since the third quarter of 2022, driven by strong physical demand from China and its central bank. It also shows a steady increase in physical investment demand as the main determinant of gold prices.
The report predicted that purchases by Chinese and global central banks would continue at their current pace, supported by excess savings, weakness in real estate, weak private sector sentiment and a move away from the dollar, respectively.
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Citi pointed to a range of developments that could support gold investment over the next 6-18 months and improve gold's performance relative to other asset classes, including trade tariffs (initially stagflationary for the US and disinflationary globally), fiscal policy consistent with inflationary unwinding of US debt, potential US debt problems, and/or a significant escalation of Middle East conflicts or other potential inflationary shocks.
Citi said it hopes the reporting framework will help stimulate investment and trading in gold, as the lack of an intuitive, regime-neutral fundamental framework that can stand the test of time has led many investors to shy away from it.
“With the relationship between gold and US real interest rates having broken down dramatically over the past two years and gold reaching all-time highs despite high real interest rates, there could never have been a better time to launch this framework,” the report said.
The study notes that at the core of this framework is the idea that investment demand from both the private and public sectors, taken as a percentage of gold mine supply, is the primary driver of the gold price. Chinese and central bank gold investment demand is expected to rise to 85% of mine supply in Q1 2024 and has averaged more than 70% of mine supply over the past two years (Q3 2022-Q1 2024), up from just 25% of mine supply over the prior three years.
The framework enables investors to contextualize, model and forecast various physical gold market dynamics and price scenarios.
The report noted that rising investment demand from China and global central banks more than offset the negative stimulus to investment demand from rising real interest rates in the United States, which in turn drove gold prices to record highs, destroying demand for jewellery and stimulating the supply of scrap.
The report noted that a downside risk to the case forecast is weaker-than-expected retail demand in China due to import quotas.
“Weakening central bank demand and delays in the Fed's interest rate normalization also pose risks to strong investment demand,” the report said.