Over the past year, gold has accumulated a growth of over 21%, ranking among the top in various asset classes.
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Looking ahead at the future trend of gold, Citigroup analyst Maximilian J Layton and others proposed a new fundamental analysis framework in a report released this week. They believe that the proportion of investment demand to gold mining supply is the main driving factor for gold pricing. Over the past two years, central bank investment demand has continued to increase, occupying the majority of mining supply, driving the gold price higher. It is expected that in the future, central bank gold purchases can support a stable gold price of $2700-3000 for 25 years.
<h2>Central bank gold demand in Q1 reached 85% of mining supply, supporting upward movement in gold price</h2>
Analysts point out that investment demand can be seen as the distribution of wealth between the private and public sectors. This wealth distribution decision is not only influenced by real interest rates, but also by geopolitical factors (such as de-dollarization) and other asset price risks.
Since the third quarter of 2022, the performance of gold prices has begun to significantly deviate from the trend of US real interest rates. Historically, the price of gold is usually negatively correlated with US real interest rates. When real interest rates rise, the opportunity cost of holding gold increases, and funds tend to reduce their allocation to gold appropriately, increasing their allocation to US bonds and the US dollar, leading to a decrease in the price of gold; conversely, the price of gold rises.
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Analysts point out that the deviation seen in the second half of 2022 is because real interest rates are just one of the driving factors for global gold investment demand. In fact, the negative impact of real interest rates on gold investment (mainly reflected in global ETF physical demand) has been offset by the surging and continuously rising global central bank investment demand since the mid-2022:
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The gold investment demand of global central banks led by China rose to 85% of mining supply in the first quarter of 2024, averaging over 70% of mining supply in the past two years (from the third quarter of 2022 to the first quarter of 2024), compared to only 25% in the previous 3 years (from the third quarter of 2019 to the second quarter of 2022). The increase in global central bank investment demand has offset the negative impact of rising US real interest rates on the gold price, squeezing jewelry demand and driving the gold price to historic highs.
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<h2>Strong gold demand from the public sector may be a trend lasting for decades, and the enthusiasm of private sector gold purchases in China continues</h2>
Analysts predict that the strong demand for gold in the public sector may be a trend lasting for decades. Based on Citigroup's basic assumptions, the public sector's gold demand in 2024 and 2025 is expected to reach historical highs of 1100 tons and 1075 tons respectively. Under an optimistic scenario, the public sector's gold demand in 2024 and 2025 could reach 1240 tons and 1225 tons respectively.
The report points out that the extent to which the price of gold rises in the face of strong investment demand will largely depend on the elasticity of jewelry demand and scrap gold prices. Compared to the gold bull market of 2008-2012, the reaction to high prices may be relatively moderate. Since 2022, despite the high prices, jewelry demand has stabilized at around 2200 tons per year.
In addition to central bank gold purchases, analysts believe that private sector gold investment demand, including global retail physical gold bar and coin demand, global ETF demand, and over-the-counter trading/other (net) demand, is also very strong, especially in China. Despite prices hitting or approaching historical highs so far this year, buying levels remain high. In the first half of 2024, retail gold demand in China hit a historical high.
Regarding ETFs, analysts expect that by the end of the year, as the Fed begins a rate-cutting cycle, ETFs will turn to buying and continue into the first half of 2025. The estimated net purchase volume for 2024 is 50 tons (with more in the fourth quarter), with a baseline scenario of 275 tons in 2025 and an optimistic scenario of 400-500 tons.
Analysts predict that gold investment demand in the next 12-18 months will rise to almost absorb all mining supply, supporting Citigroup's benchmark forecast for gold prices to reach $2700-3000 per ounce in 2025.
Citigroup points out that the next round of investment demand and price increases will come from the normalization of US interest rates (Citigroup's US economic team believes the Fed will start an 8 consecutive rate-cutting cycle from September), especially driving up ETF demand. With support from factors such as de-dollarization, it is expected that the gold buying spree by global central banks will continue

Citigroup analysts have proposed a new fundamental analysis framework, suggesting that increasing investment demand from both private and public sectors will support the gold price, especially the demand for central bank gold purchases, which will deplete mine supply. It is expected that by 2025, the price of gold will surge to $2,700-3,000 per ounce

Citigroup has proposed a new gold pricing framework, predicting that the gold price will break through the $3000 mark next year