Gold prices are on track to reach $3000 per troy ounce by the end of 2025, according to Goldman Sachs Research commodities strategist Lina Thomas.
Gold prices have risen roughly 40% during the past twelve months to over $2700 per ounce as central banks in emerging markets continue to ramp up their purchases of the precious metal.
Investors are also beginning to price in rate cuts from the US Federal Reserve, since gold typically trades in line with interest rates.
“As an asset that doesn’t offer any yield, it typically becomes less attractive to investors when interest rates are higher, and it’s usually more desirable when rates fall,” Thomas explained.
Central bank buying
Thomas said that the relationship between changes in the gold prices and changes in interest rates still exists, but sizable central bank purchases of gold bars have reset the relationship between rate and price levels since 2022.
Goldman Sachs estimates that 100 tonnes of physical demand lifts gold prices by at least 2.4%.
Since the freezing of Russian central bank assets in 2022 after the invasion of Ukraine, emerging market central bank purchases of gold have risen notably.
Concern about the risk of financial sanctions is likely one of the reasons central banks have increased their buying of gold, according to Goldman Sachs.
Thomas also pointed out that central banks in developed markets have tended to have relatively high holdings of gold as a share of reserves.
The US, France, Germany and Italy have gold holdings that make up 70% of their reserves, whereas their emerging market counterparts have smaller shares.
“China, for example, reports to have 5% of its reserves in the metal. Seen that way, some central banks in emerging markets are catching up to their counterparts in developed countries,” Thomas said.
A geopolitical hedge and ETF buying
Some investors are also concerned about the debt sustainability of the US, which has roughly $35trn of debt, roughly 124% of its GDP.
Since many central banks have most of their reserves held via US Treasury bonds, some policymakers may be growing concerned about their exposure to fiscal risks in the US.
According to Goldman Sachs Research, Western investors are returning to the gold market as the US presidential election approaches.
Gold may offer hedging benefits against potential geopolitical shocks, including rises in trade tensions, Federal Reserve subordination risk, and debt fears, the bank said.
Even if central bank buying of gold moderates, Goldman Sachs said that there could be some competition for gold bullion from Western investors as gold exchange-traded-fund holdings begin to rise.
“Long-term investors are now interested in holding gold because rates are lower,” Thomas said. “At the same time, central banks holdings are probably still going to pile up.”
