Gold Investment Demand Expected to Increase

Citi analysts have developed a new framework to understand and predict gold prices, intending to stimulate investment in this asset through a strong, regime-independent model.

This framework is designed to account for annual price fluctuations over the past 55 years and quarterly changes over the last 25 years, identifying key factors that influence gold prices.

At the heart of Citi’s model is the belief that investment demand, from both private and public sectors, relative to gold mine supply, is the chief driver of gold pricing.

Citi highlights that investment demand for gold in China and from central banks surged to 85% of mine supply in the first quarter of 2024 and averaged over 70% during the previous two years. This increase in demand has mitigated the adverse effects of rising US real interest rates, propelling gold prices to record levels.

Looking ahead, Citi projects that gold investment demand will keep climbing, potentially absorbing nearly all mine supply in the next 12 to 18 months. This supports their estimate that gold prices could reach between $2,700 and $3,000 per ounce by 2025. They expect a normalization of US interest rates, accompanied by eight consecutive Federal Reserve cuts starting in September, will drive up demand for gold exchange-traded funds (ETFs).

Furthermore, ongoing purchases by Chinese and global central banks, spurred by excess savings, weak property markets, and the move away from dollar dependency, are expected to reinforce this trend.

In addition, several factors could enhance gold investment and lead to outperformance compared to other asset classes. These include potential trade tariffs, US fiscal policies aimed at reducing debt through inflation, and geopolitical tensions, particularly in the Middle East. However, Citi also cautions that their optimistic outlook could be challenged by weaker retail demand in China, diminished central bank purchases, or delays in interest rate cuts by the Federal Reserve.