'Chase the Gold' - Goldman Sachs Ups Precious Metal Price Prediction Amid "Hidden Purchasers"
Despite a 29% YTD rally and a 47% increase since 2022, gold continues to reach unprecedented highs, hitting $2,685/toz on Thursday.
Goldman Sachs Precious Metals analysts have upped their gold price prediction from $2,700/toz to $2,900/toz for early 2025 due to two reasons.
The first reason is that our economists are now predicting faster declines in short-term interest rates in the West and China. We have recently demonstrated that the gold market hasn't fully priced in the boost to Western ETF holdings backed by physical gold from the rates, which tends to be gradual.
The second reason is our new nowcast, which shows that EM central bank purchases on the London over-the-counter (OTC) market have been fundamentally driving the rally since 2022. We believe that these structural purchases will remain high.
According to Goldman's prediction, moderating but still significant central bank purchases on the London OTC market account for about 2/3 of the expected rise of the gold price to $2,900/toz in early 2025.
The gradual increase in ETF flows following the Fed rate-cuts our economists are predicting drives the remaining 1/3 of price upside.
This prediction also depends on our rule of thumb that 100 tonnes of physical demand raises gold prices by at least 2.4%, the lower bound of our regression estimate.
Following Goldman's analysis of structurally higher demand from central banks, they created a nowcast of central bank demand in the London OTC market, where most of these transactions occur.
Central Banks Keep the Rally Going Since 2022
Investors are keen to know "Who is the 'secret' gold buyer?" as gold has rallied 47% since 2022, despite rising rates which typically predict lower prices.
While the relationship between gold-price-to-rates remains intact in changes, the 'secret' buyer has raised prices and reset the relationship in absolute levels.
Our new nowcast shows that EM central bank gold purchases on the London OTC market continue to drive the rally since 2022. Our nowcast of central bank and other institutional demand in the London OTC market shows that purchases remained robust through July, averaging 730 tons annualized year-to-date, or about 15% of global annual production estimates.
The central bank of China, the PBoC, is a key focus for gold investors, given its reported streak of 18 consecutive months of purchases since November 2022. Our estimates of China's institutional gold purchases in the London OTC market align with the PBoC reports, but tend to be higher, start earlier, and last longer.
While the PBoC reported no additional purchases after April, our nowcast estimates 50 tonnes of institutional purchases from China on the London OTC market in May, with no further activity in June and July.
Goldman's nowcasting model uses customs data and knowledge of the London OTC market, the largest hub for trading large 400 oz gold bars, which central banks and other institutions prefer due to their size and lower cost per ounce, and which are typically too expensive for most retail buyers. London also provides storage for ETF holdings, central bank reserves (held in custody at the BOE), and unallocated gold accounts. Changes in these gold bar holdings in London vaults are a proxy for OTC net demand and match UK net imports, which are available by trade partners.
Our nowcasting model consists of two components:
(1) UK exports of gold bars to the world ex-Switzerland, and
(2) the portion of UK exports of gold bars to Switzerland we identify as central bank demand.
Goldman distinguishes between UK gold bar exports to Switzerland and other countries because the former typically represent retail demand while the latter indicate central bank and institutional demand. The UK, with no (significant) gold mines or accredited refineries producing large 400 oz bars, primarily imports these large bars from Switzerland, the global refining hub, when London institutional demand or ETF inflows are high. Conversely, when demand in London is low, the UK exports large 400 oz bars back to Switzerland, where they are refined into smaller bars and sent to retail markets.
Chase the Gold
We reiterate our long gold recommendation due to i) the gradual boost from lower global interest rates, ii) structurally higher central bank demand, and iii) gold's hedging benefits against geopolitical shocks, including tariffs, Fed subordination risk, debt fears, financial, and recessionary risks.
After an already very large price rally, we end by addressing the potential factors that may moderate our base case of significant additional upside to gold prices.
These potential factors to monitor include a potential softening in our nowcast of central bank demand (for instance because of easing in geopolitical tensions), potentially lower-than-expected ETF inflows (if central banks cut rates less than expected), or a potential sharper-than-expected pullback in China's retail demand due to price sensitivity or a sharper-than-expected gain in consumer confidence.
Professional subscribers can read the full report from Goldman Lina Thomas on what is driving Goldman's increased gold price forecast.
Bottom Line
Gold continues to shine as a precious metal of choice for investors and central banks alike. With Goldman Sachs raising its gold price forecast, it seems the allure of this precious metal is not fading anytime soon. However, it's important to keep an eye on potential factors that could moderate the upward trajectory of gold prices. What are your thoughts on this? Do share this article with your friends and let us know your views. You can also sign up for the Daily Briefing, available every day at 6pm.
'Chase the Gold' - Goldman Sachs Ups Precious Metal Price Prediction Amid "Hidden Purchasers"
Despite a 29% YTD rally and a 47% increase since 2022, gold continues to reach unprecedented highs, hitting $2,685/toz on Thursday.
Goldman Sachs Precious Metals analysts have upped their gold price prediction from $2,700/toz to $2,900/toz for early 2025 due to two reasons.
The first reason is that our economists are now predicting faster declines in short-term interest rates in the West and China. We have recently demonstrated that the gold market hasn't fully priced in the boost to Western ETF holdings backed by physical gold from the rates, which tends to be gradual.
The second reason is our new nowcast, which shows that EM central bank purchases on the London over-the-counter (OTC) market have been fundamentally driving the rally since 2022. We believe that these structural purchases will remain high.
According to Goldman's prediction, moderating but still significant central bank purchases on the London OTC market account for about 2/3 of the expected rise of the gold price to $2,900/toz in early 2025.
The gradual increase in ETF flows following the Fed rate-cuts our economists are predicting drives the remaining 1/3 of price upside.
This prediction also depends on our rule of thumb that 100 tonnes of physical demand raises gold prices by at least 2.4%, the lower bound of our regression estimate.
Following Goldman's analysis of structurally higher demand from central banks, they created a nowcast of central bank demand in the London OTC market, where most of these transactions occur.
Central Banks Keep the Rally Going Since 2022
Investors are keen to know "Who is the 'secret' gold buyer?" as gold has rallied 47% since 2022, despite rising rates which typically predict lower prices.
While the relationship between gold-price-to-rates remains intact in changes, the 'secret' buyer has raised prices and reset the relationship in absolute levels.
Our new nowcast shows that EM central bank gold purchases on the London OTC market continue to drive the rally since 2022. Our nowcast of central bank and other institutional demand in the London OTC market shows that purchases remained robust through July, averaging 730 tons annualized year-to-date, or about 15% of global annual production estimates.
The central bank of China, the PBoC, is a key focus for gold investors, given its reported streak of 18 consecutive months of purchases since November 2022. Our estimates of China's institutional gold purchases in the London OTC market align with the PBoC reports, but tend to be higher, start earlier, and last longer.
While the PBoC reported no additional purchases after April, our nowcast estimates 50 tonnes of institutional purchases from China on the London OTC market in May, with no further activity in June and July.
Goldman's nowcasting model uses customs data and knowledge of the London OTC market, the largest hub for trading large 400 oz gold bars, which central banks and other institutions prefer due to their size and lower cost per ounce, and which are typically too expensive for most retail buyers. London also provides storage for ETF holdings, central bank reserves (held in custody at the BOE), and unallocated gold accounts. Changes in these gold bar holdings in London vaults are a proxy for OTC net demand and match UK net imports, which are available by trade partners.
Our nowcasting model consists of two components:
(1) UK exports of gold bars to the world ex-Switzerland, and
(2) the portion of UK exports of gold bars to Switzerland we identify as central bank demand.
Goldman distinguishes between UK gold bar exports to Switzerland and other countries because the former typically represent retail demand while the latter indicate central bank and institutional demand. The UK, with no (significant) gold mines or accredited refineries producing large 400 oz bars, primarily imports these large bars from Switzerland, the global refining hub, when London institutional demand or ETF inflows are high. Conversely, when demand in London is low, the UK exports large 400 oz bars back to Switzerland, where they are refined into smaller bars and sent to retail markets.
Chase the Gold
We reiterate our long gold recommendation due to i) the gradual boost from lower global interest rates, ii) structurally higher central bank demand, and iii) gold's hedging benefits against geopolitical shocks, including tariffs, Fed subordination risk, debt fears, financial, and recessionary risks.
After an already very large price rally, we end by addressing the potential factors that may moderate our base case of significant additional upside to gold prices.
These potential factors to monitor include a potential softening in our nowcast of central bank demand (for instance because of easing in geopolitical tensions), potentially lower-than-expected ETF inflows (if central banks cut rates less than expected), or a potential sharper-than-expected pullback in China's retail demand due to price sensitivity or a sharper-than-expected gain in consumer confidence.
Professional subscribers can read the full report from Goldman Lina Thomas on what is driving Goldman's increased gold price forecast.
Bottom Line
Gold continues to shine as a precious metal of choice for investors and central banks alike. With Goldman Sachs raising its gold price forecast, it seems the allure of this precious metal is not fading anytime soon. However, it's important to keep an eye on potential factors that could moderate the upward trajectory of gold prices. What are your thoughts on this? Do share this article with your friends and let us know your views. You can also sign up for the Daily Briefing, available every day at 6pm.
