What Will Drive Gold’s Next Leg Higher?
Gold price continues to smash records and surpass analyst forecasts
Risk and uncertainty, and not fundamentals, are the key driver of the rapidly rising gold price, according to World Gold Council chief market strategist John Reade.
The gold price hit another new high of US$3147.85 an ounce on the morning of day one of the Mining Forum Europe in Zurich.
It was the 20th high so far this year for the gold price, coming off the back of a 26% rise last year.
Reade told the conference central bank buying and investment demand had been strong, driven by emerging markets, offsetting weakness in jewellery demand and flat bar and coin demand.
“Since the middle of 2022, central banks have bought over 1000 tonnes of gold a year in each of the last three years,” Reade said.
“Why the increase? Probably a number of factors – the change in inflation expectations over the medium term and the slow de-dollarization that's been taking place, but the big thing was the sanctions that were placed on the Central Bank of Russia following the invasion of Ukraine that has led central banks to think very carefully about the assets that they want to hold in their reserve portfolios.
“The potential for the central bank buying to increase further has only increased with the status of the new administration in America, so I expect to see strong central bank being part of this market for years to come.”
On the other hand, exchange-traded fund flows have been disappointing.
“The reason I say disappointing is because we've seen outflows from ETFs for each of the last four years, including last year,” Reade said.
“They've been driven by European and North American selling. The only areas we've seen positivity over the last couple of years has come from, again, emerging markets, China and India – small holders of ETFs compared to Europe and North America.”
However, that trend started to shift in the second half of 2024, with positive inflows from all regions.
“Asia’s still buying, North America and Europe turning positive as well, and that's a trend that has continued this season,” Reade said.
The year so far
The gold price rose by 19% in the March quarter.
Reade noted the WGC’s 2025 forecast, released in December, was for “modest” gains in the gold price this year.
“We've already smashed through those expectations because it's politics that's driving gold at the moment, as much as economics,” he said.
While the ETF figures for the March quarter aren’t yet available, Reade estimates inflows of around 217 tonnes.
“So already, that's going to be about 400 tonne improvement compared to the outflows we saw last year,” he said.
“In terms of positions held by speculators and investors on the COMEX futures market, they've actually declined a bit this year, despite gold going on to a record high, and to be honest, that always reassures me.
“I hate to see a record level of speculative involvement in gold, because then the potential for profit taking comes through.”
The next leg up
Reade said a few things needed to occur for gold to move higher still.
“I think the first thing that needs to happen is strong central bank purchases need to continue – that's almost certain,” he said.
“The second thing, though, is we need to see more investment demand from the West. The West has underperformed in terms of investment over the last four years, and yes, ETF buyers have come back and are buying good amounts of gold, but the bar and coin market still remains weak.
“If the bar and coin market, which is bigger usually than ETFs, returns in Germany, Switzerland, North America, there’s plenty of drivers to take gold higher.”
Reade said the US election result was gold-positive in the medium term.
“Risk and uncertainty is one of the major drivers of investment demand around the world, and risk and uncertainty are at unprecedented levels,” he said.
“At the moment, there will be a big announcement tomorrow on tariffs – nobody knows what it’s going to be.
“Gold is now at a fresh all-time high. It’s being driven by risk and uncertainty.
“Personally, I think risk and uncertainty is going to remain elevated this year and maybe the next few years.”
Forecasts struggling to keep up
Gold’s rise has been so rapid that the price is often surpassing analysts’ forecasts within days of them being made.
Morgan Stanley said last week that gold’s next leg up would be more difficult but retained the belief the price was yet to peak.
“Jewellery demand is showing signs of slowing, and may need some price stabilisation to return, although physical demand from central banks and investment remains strong,” it said.
Last week, Citi upgraded its three-month forecast for gold to US$3200/oz, from US$3000/oz, and kept its 12-month forecast at US$3000/oz.
“We continue to recommend buying into any major dip as we see room for prices to rally further, underpinned by robust official sector demand and higher ETF demand,” Citi said.
Citi sees a 30% likelihood of gold reaching US$3500/oz by the end of the year.
On Monday, RBC Capital Markets revised its forecast, setting its new base case average for 2025 at US$3039/oz and US$3195/oz in 2026 “amid bad vibes and high uncertainty”.
“While we are still not ruling out the possibility of a correction from uncertainty driven highs (towards our new low scenario of US$2821/oz in 2025), it’s clear that economic sentiment has deteriorated and gold’s appeal is more durable in this environment, meaning elevated prices should hold,” RBC commodity strategist Christopher Louney said.
Like Morgan Stanley, RBC sees the next leg relying on soft data weakness turning into hard data weakness.
“This would drive a more aggressive investor-led push higher in prices towards our high scenario with more money flowing into the metal on an underlying basis than in our baseline,” Louney said.
“While broader economic sentiment outside of gold is now dented, thus underscoring gold’s appeal, we are of the view that most of what drove gold to all-time highs and kept it roughly around those levels is uncertainty, and uncertainty is inherently uncertain – therefore necessitating soft data weakness turning harder to really achieve some of the loftier targets out there (our high scenario has US$3263/oz in 2025, peaking at US$3496/oz before year-end).”
Meanwhile, Australian firm Argonaut said on Monday that the global backdrop had shifted to a “perfect storm” for gold.
“ETF inflows have now joined the party and we see a pathway for gold to continue to climb to US$4,000/oz by 2027,” it said.