Reasons Why Gold Will Rise Further

Gold prices continue to hit record highs. Among market participants, there is active debate over whether prices will rise further or if a correction is coming. In this article, based on the analysis of Goldman Sachs commodity strategist Lina Thomas, we will explain in detail the factors behind the rise in gold prices and the future outlook.

1. Factors behind the rise in gold prices over the past year

1-1. Central bank gold purchases since 2022

In 2022, the freezing of the Russian central bank's assets by the U.S. and Western nations served as a major wake-up call for the central banks of many emerging countries. As a result,

concerns arose, and gold purchases surged. Consequently, central bank demand for gold expanded fivefold on an unprecedented scale and has shown no signs of slowing down since.

1-2. The relationship between rising interest rates and gold prices

Normally, rising interest rates are a headwind for gold prices. This is because,

• since gold does not generate interest, its relative attractiveness decreases in a high-interest-rate environment.

• However, central bank gold purchases boosted demand, offsetting the negative impact of rising interest rates.

It has been confirmed that even during the U.S. Federal Reserve's interest rate hike phase in 2022, central bank demand pushed up gold prices.

2. Factors behind the rise in gold prices in 2024

2-1. U.S. monetary policy and gold demand

Entering 2024, the Federal Reserve's signaling of interest rate cuts has further increased investor interest in gold.

• Central banks continue to purchase gold

• Investors increase their investment in gold in anticipation of interest rate cuts

This dual demand is a factor pushing gold prices even higher.

2-2. Trade friction and geopolitical risks

When trade friction and geopolitical risks rise, demand for gold, a safe-haven asset, increases.

In 2024, amid rising trade tensions and political uncertainty, gold prices may continue to rise.

3. Gold Price Forecast for 2025

3-1. Goldman Sachs Forecast

Goldman Sachs predicts that gold prices will reach $3,100 by the end of 2025.

Basis for the forecast

1. Structural central bank gold demand:

   • Central banks will continue to purchase gold to reduce their reliance on US dollar assets.

2. Increased ETF inflows:

   • As the Fed proceeds with interest rate cuts, capital inflows into gold ETFs will strengthen.

Furthermore,

• If safe-haven demand increases, a rise to $3,300 is also in sight

• If geopolitical risks rise, further gains are also expected

3-2. Relationship between the US dollar and gold prices

At first glance,

• when the US dollar strengthens, gold prices fall

it seems that this relationship holds true. However,

In particular, the People's Bank of China (PBOC) tends to purchase gold when the yuan falls, and this movement acts as a support factor for gold prices.

4. The Role of Gold for Investors

4-1. Positioning of gold in a portfolio

For investors, gold plays the following three roles:

1. Long-term holding asset:

   • With central bank support, long-term appreciation can be expected.

2. Strategic Trading:

   • Caution is required for short-term trading as there is currently a risk of temporary correction.

3. Risk Hedging:

   • A means of diversification to prepare for the risk of declines in stocks and bonds.

4-2. Short-term price fluctuation risk

In the gold market, when uncertainty increases, investment funds flow in temporarily, which can lead to sharp drops due to the subsequent unwinding of positions.

Therefore, it is important to build a portfolio that anticipates short-term fluctuations.

The current gold market has

• increased demand from central banks

• inflow of investor funds

• heightened geopolitical risks

and other factors overlapping, leaving room for further gains. However, since a correction phase is also possible in the short term due to market overheating, appropriate risk management is necessary.

Goldman Sachs' forecast suggests the possibility of reaching $3,100 by the end of 2025, and $3,300 in further risk scenarios.

It will be necessary to make careful investment decisions while paying attention to future trends in the gold market.

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