A month ago, Goldman Sachs precious metals analyst Lina Thomas believed that due to the continuous purchasing of gold by central banks, especially the fervent pursuit of gold by China, gold would rise to $3,000 by the end of 2025.
This view from the bank was quickly challenged by skeptics, who argued that with the dollar reaching historic highs, gold is unlikely to maintain its upward momentum, and a stronger dollar is one of the biggest consensus points of the Trump trade.
In response, Thomas also hit back, stating in a note that she disagrees with the argument that gold cannot rise to $3,000 per ounce by the end of 2025 in the context of a continuously strengthening dollar, citing four reasons:
First, Goldman economists expect that in a global monetary easing cycle, the Federal Reserve will lower interest rates while the dollar strengthens, but it will be U.S. policy rates that drive investor demand for gold, with the dollar not playing a significant additional role. In the bank's baseline assumption, a 100 basis point cut by the Federal Reserve would boost gold prices by 7% by the end of 2025, but if the Fed only cuts rates once more (which seems increasingly likely), gold prices are estimated to rise to $2,890 per ounce.
Secondly, Thomas disagrees with the view that a stronger dollar will prevent central banks from structurally increasing their gold purchases (in her baseline assumption, increased gold purchases by central banks would raise gold prices by 9% by the end of 2025), as central banks tend to purchase gold internationally with dollar reserves. In fact, large central bank buyers tend to increase their demand for gold when their local currencies are weak, to bolster confidence in their domestic currencies.
Third, the trend of both the dollar and gold prices rising with uncertainty supports their role as a hedge in a portfolio, including hedging against tariff escalations.
Finally, Goldman economists expect that broader easing policies should have a roughly neutral net impact on China's gold retail demand, as the stimulus from lower interest rates on gold demand is roughly offset by the impact of rising local gold prices.
Overall, the biggest downside risk to Goldman Sachs' bullish stance is not a stronger dollar, but rather that the Federal Reserve may lower interest rates less than expected (as rate cuts would trigger more severe inflation, further driving up gold prices).
One aspect of Goldman Sachs' predictions has already begun to take effect: according to the bank's projections for central banks and other institutions purchasing gold in the London OTC market, central banks purchased as much as 64 tons of gold in October (the average level before 2022 was 17 tons), with China once again becoming the largest buyer, purchasing 55 tons of gold, while the official figures reported by the People's Bank of China were only 5 tons. In other words, the amount of gold China secretly bought is ten times more than what it publicly acknowledged.
Goldman Sachs analysts wrote in response to the surge in purchases, "Surveys and history suggest that central banks in emerging markets buy gold to hedge against financial and geopolitical shocks," adding, "Central bank purchases will remain high, as concerns over geopolitical shocks have structurally increased since the freezing of Russian reserves in 2022, and the share of gold in the reserves of central banks in emerging markets is relatively low compared to developed countries, leaving room for growth." In fact, 81% of central banks surveyed by the World Gold Council expect that the global central bank gold holdings will rise in the next 12 months, with none expecting a decline.
The following are excerpts from questions and answers in Goldman Sachs' latest report:
Question 1: How much gold did central banks purchase in the London over-the-counter market in October?
Goldman Sachs projected the demand for gold from central banks and other institutions in the London OTC market, with October's demand at 64 tons, significantly higher than the bank's assumption of 47 tons. China once again became the largest buyer, increasing its purchases by 55 tons, followed by Azerbaijan (including the State Oil Fund of Azerbaijan) and the UAE, each adding 3 tons.
Even more shocking is that the amount of gold purchased reported by the People's Bank of China is not large, while the actual amount of gold purchased by China in the London OTC market is much larger, with a staggering gap between the two (which is constantly widening), clearly attempting to cover up China's astonishing demand for precious metals and thereby conceal its diversification away from the dollar.
Question 2: Why are central banks buying so much gold now?
Goldman wrote that surveys and history indicate that central banks in emerging markets buy gold to hedge against financial and geopolitical shocks, and concerns about geopolitical shocks have structurally increased since the freezing of Russian reserves in 2022, as we pointed out years ago.
Based on the U.S. financial sanctions index and U.S. credit default swap (CDS) spreads, Goldman found that concerns over geopolitical shocks and fears of impacts on U.S. sovereign debt or the financial system can explain central banks' gold purchasing behavior well.
In financial terms, since the global financial crisis, many central banks in emerging markets have sought to diversify their reserves, viewing gold as a financial hedge.
In geopolitical terms, sanctions, especially freezing central bank assets, have played a crucial role. The first round of sanctions against Russia in 2014 led to an increase in gold reserves, as the Russian central bank anticipated a situation similar to that of Libya and Iran; one council member pointed out that gold cannot be 'seized or frozen.' However, the freezing of the Russian central bank's assets in 2022 marked a clear turning point, prompting many central banks in emerging markets to rethink what is considered risk-free. Following the freeze, purchases by central banks and other institutions in the London OTC market surged fivefold. In China, prominent economists emphasized the necessity of diversifying foreign exchange reserves to mitigate potential U.S. sanctions.
Question 3: Will central banks continue to accumulate gold?
Yes! Even if the assets of the Russian central bank are unfrozen, the precedent set by the freezing in 2022 has reshaped central banks' views on tail risks. Moreover, compared to central banks in developed markets, central banks in China and other emerging markets tend to hold a relatively small share of reported gold reserves, leaving substantial room for growth. Goldman noted that this growth could be gradual.
According to a survey by the World Gold Council in 2024, among the 69 central banks surveyed from February to April 2024, 81% expect that global central bank gold holdings will rise in the next 12 months, with none expecting a decline. Regarding their own reserves, 29% of respondents plan to increase their gold holdings, the highest proportion since the survey began in 2018.
Question 4: How do the strong forecasts of global central banks affect your prediction of $3,000 per ounce of gold by the end of 2025?
As mentioned above, Goldman Sachs believes that its $3,000 per ounce gold price prediction by the end of 2025 faces two risks: the downside risk of a higher federal funds rate relative to the baseline scenario, and some upside risks from more determined central bank purchases. In particular, if Goldman’s forecast exceeds the current prediction by 10 tons each month, then Goldman’s prediction for the gold price by the end of 2025 may have an upside potential of $50 (or more), rising to $3,050 per ounce (baseline prediction is $3,000 per ounce).
Conversely, if the Federal Reserve's final rate is 100 basis points higher than Goldman economists' baseline forecast of 3.25-3.5%, which means the Federal Reserve would only cut rates once more, then the gold price by the end of 2025 would be about $100 lower than our current prediction.
Article reposted from: Jin Ten Data