The Golden Lifeline

Global turbulence is propelling gold prices upward. This week, gold reached a record high of $2,758.37 per ounce, although it corrected slightly to $2,726.25 by the end of the week, a 1.2% dip. However, this modest correction is insignificant, given that prices have surged nearly 2.5% in the past month alone and 37.4% over the past year. Could further increases occur? Absolutely. Might we see a 10-15% correction? Also likely. Keep an eye on news around war and elections – that’s where all the clues lie. The most intriguing part of this trend is how prices consistently exceed the predictions from the most esteemed expert institutions.

The latest cycle of robust growth in gold prices began in late February 2024. Focusing on this period reveals that between 22 February and 25 October, gold prices increased by 34.4%, which accounts for the lion’s share of annual growth. It’s worth recalling analysts’ forecasts just before this months-long rally began. On 22 February, Goldman Sachs Research published a report highlighting factors such as aggressive gold purchases by central banks as key drivers. Their February forecast was rather conservative, predicting a 6% increase over the next 12 months, reaching $2,175 per troy ounce. Reality, however, has proven far harsher. Prices surged by more than a third over just the past eight months, now exceeding $2,700 per ounce.

This surge occurred despite the predictions aligning closely with actual factors. Firstly, there is ongoing uncertainty around the Federal Reserve’s interest rate policy; when rates begin to fall, gold becomes more attractive to investors. Secondly, large-scale gold purchases by central banks in response to geopolitical tensions are on the rise. Sources of geopolitical strain include fears in China and India of potential sanctions, Russia’s war in Ukraine, and the lingering effects of the COVID-19 pandemic.

How influential is the Fed’s role in all this? The Federal Reserve lowered rates for the first time in four years in mid-September, after which gold prices climbed 6.3% over the following month. The next Federal Reserve meeting is scheduled for 6-7 November – so fasten your seatbelts.

It is likely that the Fed will not cut rates by half a percentage point in November, as it did in September. However, even a quarter-point reduction anticipated for November remains significant. Additionally, another rate review by the Fed is planned for December, though whether the rate-cutting cycle continues or pauses remains uncertain. This will depend on forthcoming inflation and unemployment data.

But we must consider these as objective factors, similar to weather patterns – things only marginally influenced by policy decisions. There is, however, one powerful driver: the growth in gold prices is largely due to the volume of central banks purchases.

Surprisingly, over the past 12 months, and in 2023 as a whole, the leading nations buying gold for central bank reserves have been China, Turkey, Poland, India, and Singapore. Notably, in 2023, China purchased more gold than Turkey and Poland combined, who ranked second and third. It’s reasonable to assume these countries had slightly different motivations for buying gold. China and Turkey, as well as India, aim to reduce their central banks’ reliance on dollar and euro reserves. They’re observing what’s happening with Russian assets in the EU, US, and UK – frozen under sanctions, immobilised, and potentially subject to confiscation for the benefit of victims of Russian aggression. Acting with restraint and avoiding military posturing? Not the approach of geopolitical machos. Consequently, the most authoritarian regimes are seeking refuge in gold – tangible bars of yellow metal.

And what about Poland and Singapore? Their motives are entirely different. Both countries live in the shadow of dominant neighbouring powers, with Singapore particularly positioned at a crossroads between India and China. For Poland, the threat comes solely from the East. This threat has already materialised, with Russian missiles and drones occasionally entering Polish airspace, though fortunately without serious consequences. The numbers speak volumes: by 2023, China had purchased 7.23 million ounces of precious metal for the People’s Bank of China reserves – and they’re continuing to buy.

So where does Goldman Sachs stand with its overly cautious forecasts? In late September, it revised its 2024 average price prediction for gold to $2,395 per ounce, up from $2,357, and raised the 2025 forecast to $2,973 per ounce, up from $2,686. While “average price” is less meaningful for the general buyer than a target price for a specific date, Goldman Sachs also raised its early 2025 forecast significantly – from $2,700 to $2,900 per ounce.

Their counterparts at Citi Research similarly increased their three-month gold price forecast, from $2,700 at the end of January 2025 to $2,800 per ounce. They now expect gold to reach $3,000 per ounce within six to twelve months. These projections were made public earlier this week.

Why not? Rates are gradually falling, Trump’s chances of winning the US election are rising, and geopolitical instability shows no signs of abating.