Gold Prices Poised for Rise: Factors Driving the Precious Metal’s Rise

Gold prices are set to climb in the coming months, with forecasts indicating a potential 6% increase to reach $2,175 per troy ounce, according to Goldman Sachs. However, near-term trading may see some volatility amid uncertainties surrounding Federal Reserve interest-rate policies. Gold, being a non-yielding asset, tends to lose appeal among investors during periods of higher interest rates. Despite this, several key factors are expected to limit the downside risks to gold prices.

Strong Central Bank Purchases and Geopolitical Tensions

Central bank acquisitions of gold, particularly notable in countries like China and India, have played a significant role in supporting gold prices amidst outflows from gold exchange-traded funds. This surge in purchases is partly attributed to geopolitical tensions, such as the US’s involvement in Ukraine and the ongoing Covid-19 pandemic. Central banks have ramped up their gold reserves, with an average purchase of 1,060 tonnes between 2022 and 2023, compared to 509 tonnes acquired from 2016 to 2019. This trend is likely to continue as emerging market countries diversify their reserves and geopolitical tensions remain elevated.

Investment Demand and Speculative Positioning

Investment demand for gold, particularly through ETFs, is yet to rebound significantly. While major disruptions like the Russia-Ukraine conflict and the Silicon Valley Bank crisis prompted gold purchases in recent years, ETF holdings have remained high despite rising long-term US yields. Speculative positioning by hedge funds has closely followed shifts in long-term yields, indicating greater sensitivity to macroeconomic policy changes than ETF holdings. Historically, gold ETF holdings have surged during periods of risk-off sentiment and easier monetary policies. Expectations of the Fed cutting rates, potentially starting as early as May, could drive ETF holdings higher.

Strong Retail Demand in Emerging Markets

The “wealth effect” resulting from rising incomes in emerging markets is fueling robust consumer demand for gold, particularly in jewelry. In China, gold emerged as one of the best-performing assets in 2023, driven by weak consumer confidence and growth concerns, which bolstered demand for gold as a safe-haven asset. At the Goldman Sachs Global Macro Conference in Hong Kong, around 40% of participants anticipated gold prices surpassing $2,200 per troy ounce by year-end. Analysts foresee strong retail demand in China over the coming year, propelled by the property slowdown and investor apprehensions surrounding the Chinese equity market.

Final Thoughts

The outlook for gold prices remains optimistic, supported by a combination of factors including central bank purchases, geopolitical tensions, investment demand, and strong retail consumption in emerging markets. While short-term fluctuations may occur, the underlying drivers suggest a favorable trajectory for gold, positioning it as a valuable asset amid global economic uncertainties. Investors and analysts alike are closely monitoring these dynamics, anticipating further growth in gold prices in the foreseeable future.