Gold prices are forecast to rise 6% in the next 12 months

Gold prices are poised to rise as central banks purchase the precious metal and as strong retail demand in emerging markets bolsters prices, according to Goldman Sachs Research.

The yellow metal is forecast to climb about 6% in the next 12 months to $2,175 a troy ounce, Nicholas Snowdon, head of metals in Commodities Research, and analyst Lavinia Forcellese write in the team’s report. They point out gold prices may trade in a range in the near term amid uncertainty about Federal Reserve interest-rate policy. (Gold, which doesn’t offer yield, tends to be less attractive to investors when interest rates are higher.) The downside risks to gold prices, meanwhile, are expected to be limited by several key factors.

Central bank purchases are strong and geopolitical tensions are high. Gold buying by central banks — particularly from China and India — have helped offset money flowing out of gold exchange-traded funds. Those purchases have been driven in part by geopolitical tensions, such as Russia’s invasion of Ukraine, and the Covid pandemic.

Central banks bought an average of 1,060 tonnes from 2022 to 2023, compared with 509 tonnes bought between 2016 to 2019. The increase comes as China shifts reserves away from US dollars and countries such as Poland also ramp up their gold reserves.

“We expect central bank purchases will remain strong on the back of reserve diversification by EM countries and elevated geopolitical tensions,” our analysts write.

Investment demand for gold is yet to rebound. The recent lack of ETF purchases is probably because gold-ETF holdings were already high, particularly compared with the level of real (inflation-adjusted) interest rates. Major disruptions, like the Russia-Ukraine conflict and the Silicon Valley Bank crisis in the US, sparked purchases of gold in recent years, and holdings have stayed elevated despite the rise in long-term US yields.

Recently, speculative positioning in gold by the likes of hedge funds has tracked the shift in long-term yields, according to Goldman Sachs Research. This suggests there’s more sensitivity to shifts in macroeconomic policy than to ETF holdings, which have continued to have outflows.

Historically, changes in gold ETF holdings have often been triggered by major risk-off events (when the appetite for risk declines) and by cycles of easier monetary policy. Our analysts expect ETF holdings to climb once the Fed starts cutting rates, which our economists think could begin as early as May.

Strong retail demand for gold could propel the metal’s price higher. Meanwhile, the “wealth effect” of rising incomes in emerging markets is driving consumer demand for gold, especially in jewelry.

“The rapidly growing cohort of ‘affluent’ consumers in India … will drive growth in jewelry consumption,” our analysts write. “Moreover, gold consumption has also been supported by a lack of alternative investments in some countries which saw big policy shifts (Turkey, China) in the past few years.”