Gold prices are poised to reach $3,000 per troy ounce by the end of 2025, according to Lina Thomas, a commodities strategist at Goldman Sachs Research. Over the past year, gold prices have surged approximately 40%, surpassing $2,700 per ounce, driven by increased purchases of the precious metal by central banks in emerging markets.
Thomas noted that investor sentiment is shifting as market participants begin to factor in potential interest rate cuts from the U.S. Federal Reserve. Given that gold does not generate yield, it tends to be less appealing to investors in a high-interest-rate environment but gains desirability as rates decline.
Central Bank Purchases and Market Dynamics
While the historical relationship between gold prices and interest rates remains intact, substantial gold purchases by central banks have altered this dynamic since 2022. Goldman Sachs estimates that an increase of 100 tonnes in physical gold demand can elevate gold prices by at least 2.4%.
The freezing of Russian central bank assets following the invasion of Ukraine in 2022 has significantly boosted gold buying among central banks in emerging markets. This uptick is likely influenced by concerns over potential financial sanctions, prompting these institutions to bolster their gold reserves.
Thomas highlighted that central banks in developed countries tend to hold a higher percentage of gold in their reserves. For instance, the U.S., France, Germany, and Italy allocate about 70% of their reserves to gold, whereas emerging market nations typically have smaller proportions. China, for example, reports that only 5% of its reserves are held in gold, indicating that some emerging market central banks are working to align their gold holdings with those of their developed counterparts.
Geopolitical Hedge and Investor Behavior
Investor concerns regarding the sustainability of U.S. debt, which stands at approximately $35 trillion—around 124% of GDP—are also contributing to increased gold demand. Many central banks hold a significant portion of their reserves in U.S. Treasury bonds, leading some policymakers to worry about potential fiscal risks associated with U.S. debt levels.
Goldman Sachs also reports that Western investors are returning to the gold market in anticipation of the upcoming U.S. presidential election. Gold is viewed as a hedge against possible geopolitical shocks, such as escalating trade tensions, risks related to the Federal Reserve, and broader debt concerns.
Even if central bank demand for gold begins to stabilize, Goldman Sachs anticipates that Western investors may drive competition for gold bullion as holdings in gold exchange-traded funds (ETFs) rise. “Long-term investors are increasingly interested in gold as interest rates remain lower,” Thomas stated. “At the same time, central bank holdings are expected to continue increasing.”
Overall, Goldman Sachs’s outlook underscores the growing significance of gold as both an investment and a safeguard against various economic uncertainties.
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