Falling interest rates and central bank demand boost gold prices
“Gold has rallied 40% since 2022, even as US interest rates have continued to rise. This is very strange. Normally, higher interest rates make gold less attractive – because gold does not pay interest like bonds,” said Lina Thomas, commodity strategist at Goldman Sachs Research.
That relationship changed dramatically in early 2022, Thomas said, when the United States and other Western countries responded to Russia-Ukraine tensions by freezing (and in some cases seizing) the assets of the Russian central bank.
“It was a wake-up call for central banks around the world. They started diversifying their reserves away from the dollar and into an asset that no one could freeze, which was gold,” she said.
As a result, central bank gold purchases have maintained gold prices even as investors seek higher yields from other assets.
“We don’t see a reduction in central bank demand,” she added. “And with the Federal Reserve cutting interest rates, investors are also returning to the gold market.”
Gold price forecast to hit $3,000/ounce by 2025
Commodity analysts at Goldman Sachs - one of the world's largest investment banks and financial institutions - have reaffirmed their view that gold prices will reach $3,000 an ounce by the end of 2025.
Although billionaire Donald Trump's US presidential election victory and the Republican Party's dominance in Congress have caused some sell-offs and profit-taking in the gold market, the investment bank commented that the factors that pushed gold to record highs have not disappeared.
“The underlying driver of this forecast is higher demand from central banks, while cyclical support will come from inflows into exchange-traded funds (ETFs) as the Fed cuts rates,” the analysts wrote in a note.
Although central bank gold purchases slowed in the third quarter, analysts expect demand to remain steady in the near future as countries continue to diversify their official reserves away from the US dollar.
Goldman Sachs also noted that the growing US government debt could further spur central banks to increase their gold reserves.
Some experts believe that Trump’s election victory has pushed bond yields and the US dollar higher, creating significant headwinds for gold. Traders and investors are now focused on Donald Trump’s “America First” policies. However, Goldman Sachs believes that these policies could also support gold prices until 2025.
“The unprecedented escalation of trade tensions could increase speculative activity in gold,” analysts said.
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