Goldman Sachs forecasts that gold price sales will increase by 6% in 12 months, thanks to the purchasing power of central banks and strong demand from people in China, India…

Goldman Sachs’s latest commodity market report forecasts the precious metal will rise about 6% over the next 12 months, to $2,175 an ounce.

According to the report, gold prices will fluctuate in the short term in the context that investors are still uncertain about the interest rate policy of the Federal Reserve (Fed). Precious metals tend to be less attractive to investors when USD interest rates are high. However, the downside risk with this precious metal will also be limited thanks to a number of key factors.

Geopolitical tensions cause central banks to increase their gold holdings. Gold purchases by central banks, especially from China and India, have helped offset recent outflows from gold exchange-traded funds (gold EFTs).

Central banks bought an average of 1,060 tons of gold from 2022 to 2023, compared with 509 tons purchased from 2016 to 2019. The increase comes as China increases the proportion of foreign exchange reserves in gold and Reduce USD holdings. Besides, some other countries such as Poland also increased their gold reserves.

“We expect central bank gold purchases to remain strong on the back of emerging economy reserve diversification and rising geopolitical tensions,” the Goldman Sachs report said.

Another important factor driving gold prices, according to Goldman Sachs experts, is retail demand. The “wealth effect” due to rising incomes in emerging markets is boosting consumer demand for gold, especially jewelry.

In China, gold is one of the best-performing assets in 2023 amid demand for safe-haven investment. About 40% of survey participants at the Goldman Sachs Global Macro Conference in Hong Kong also think gold will reach $2,200 by the end of this year.

Goldman Sachs analysts believe that the downturn in the real estate market and investor concerns surrounding the Chinese stock market will boost retail gold demand in the country next year. 

The Goldman Sachs report also wrote: “The wealthy consumer group in India is growing rapidly, which will drive jewelry consumption growth.” Furthermore, gold consumption is also supported by the lack of alternative investment channels in some countries with major policy changes such as Turkey and China in the past few years.

However, investment demand for this precious metal has not yet recovered. Gold ETF holdings have been at a high level, partly causing the market to lack buying power. The Russia-Ukraine political conflict and the US banks crisis have boosted gold investment in recent years and gold holdings have remained high, despite rising long-term USD yields. According to Goldman Sachs, cash flows into gold ETV funds become more sensitive to changes in macroeconomic policy.

Historically, changes in gold ETF holdings have often been triggered by major de-risking events (when risk appetite declines) and by monetary policy easing cycles. Goldman Sachs analysts expect ETF holdings to increase as the Fed begins cutting interest rates, which the economists say will happen as early as May.