Goldman Sachs stated on Tuesday that its target price for gold in 2025 ($3,000 per ounce) faces the main downside risk of a reduction in the extent of Fed rate cuts, rather than a strong dollar.
Goldman Sachs stated in a report: "We refute the common argument that gold prices cannot rebound to $3,000 per ounce by the end of 2025 when the dollar remains strong for a longer period."
Driven by a wave of central bank interest rate cuts and escalating geopolitical tensions, gold rose to a historic level of $2,790.15 per ounce in October, having soared over 30% this year.
Goldman Sachs expects that if the Federal Reserve further cuts interest rates by 125 basis points, gold prices will rise by 7%. However, if the Fed only cuts rates by another 25 basis points, the bank expects gold prices to rise to $2,890 per ounce by the end of 2025.
Gold often benefits from expectations of interest rate cuts, as lower rates reduce the opportunity cost of holding non-yielding assets.
Goldman Sachs stated: "We disagree that a strong dollar will prevent central banks from buying gold; in our base case forecast, central bank purchases will drive gold prices up by 9% by the end of 2025, as this will consume dollar reserves."
It also noted, "We found that the net impact of (renminbi) depreciation and broader easing policies on Chinese retail gold demand is roughly neutral."
Official data from the People's Bank of China on Saturday showed that after a six-month pause, the central bank resumed increasing its gold reserves in November.
Gold's record surge has paused after the election, dropping about 3% in the past month. Meanwhile, the stock market has been rising, with the S&P 500 index up nearly 6% during the same period, as investors' risk appetite has improved and reduced safe-haven assets.
Nevertheless, Goldman Sachs believes that gold has only faced a temporary setback. The bank expects that loose monetary policy and central bank purchases may help support gold prices in the new year.
Goldman Sachs commodity strategist Lina Thomas pointed out, "Since 2022, even as U.S. interest rates have risen, gold prices have soared by 40%. This is strange; usually, higher rates diminish gold's appeal—because unlike bonds, gold pays no interest."
Thomas believes that this correlation changed during the outbreak of the Russia-Ukraine conflict in 2022. The freezing of Russian assets by Western countries made gold an attractive option compared to the dollar. The result was increased central bank purchases, which supported gold prices during the Fed's rate hikes.
"This has sounded the alarm for global central banks," Thomas added. "They are beginning to diversify their reserves away from the dollar towards an asset that cannot be frozen—namely, gold."
The escalation of global geopolitical tensions has increased gold's appeal this year, as risk-averse investors view gold as a safe haven. Despite investors showing interest in riskier assets as concerns about tensions have eased, central bank purchases should once again support gold prices.
Thomas said, "We believe central bank demand will not slow down. As the Fed cuts rates, investors are also starting to re-enter (gold)."
Article forwarded from: Jin Shi Data