Citi Analysts Introduce New Framework to Forecast Gold Prices

Citi analysts have unveiled a new framework to understand and forecast gold prices, aiming to reinvigorate investment in the precious metal. This model explains annual price movements over the past 55 years and quarterly changes over the past 25 years, identifying key drivers of gold prices.

The framework highlights that investment demand from both private and public sectors, relative to gold mine supply, is the primary driver of gold pricing. Citi notes that in the first quarter of 2024, gold investment demand in China and central banks rose to 85% of mine supply, averaging more than 70% over the past two years. This surge in investment demand has offset the negative impact of higher US real interest rates, pushing gold prices to record highs.

Citi forecasts continued growth in gold investment demand, potentially absorbing nearly all mine supply over the next 12-18 months. This underpins their projection for gold prices to reach $2,700-3,000 per ounce by 2025. The expected normalization of US interest rates, with “eight consecutive Fed cuts starting in September,” is anticipated to drive higher ETF demand.

Additionally, continued buying by Chinese and global central banks, influenced by factors such as excess savings, weak property markets, and de-dollarization, will support this trend. Potential developments like US trade tariffs, fiscal policies aimed at debt inflation, and geopolitical tensions could further boost gold investment.

However, Citi cautions that risks to their bullish forecast include weaker-than-expected retail demand in China, reduced central bank demand, or delays in Fed interest rate cuts.