Citi analysts have come up with a new investment thesis for gold, which they say explains price movements over more than four decades and predicts further upside over the next year or so.
It comes as gold speculators await news from the US Federal Reserve about the timing of an expected interest rate cut, with the price of the precious metal traditionally inversely correlated to movements in rates.
Citi, in a new research note, posits that investment demand from both the public and private sector can be seen as the most important factor driving the gold price, and can explain why the price has remained elevated in a high interest rate world.
“At the core of the framework is the notion that investment demand – from both private and public sector – taken as a share of gold mine supply is the primary driver of gold pricing,’’ Citi says.
“Gold investment demand in China and central banks has risen to 85 per cent of mine supply during the first quarter of 2024, and averaged more than 70 per cent of mine supply over the past two years, up sharply from only 25 per cent of mine supply over the three years prior.
“The increase in investment demand from China and global central banks has more than offset the negative investment demand impulse coming from higher US real interest rates, which has required gold prices to move to record highs in order to destroy jewellery demand and incentivise scrap supply.
“Looking ahead, we expect gold investment demand to rise to absorb almost all mine supply over the next 12-18 months, underpinning our base case for $US2700-$US3000 per ounce gold during 2025.’’
Gold is currently changing hands for $US2361.61 an ounce, or $3518.49 in local currency.
Citi says that the relationship between gold prices and private (household) and public (central bank and government) investment demand as a share of mine supply has been “remarkably strong’’. They say this holds true over 45 years on an annual basis and over the past 25 years on a quarterly basis.
“As investment demand rises as a share of mine supply, prices move higher to price out jewellery consumption, incentivise jewellery scrap supply, and incentivise gold stockholders to sell,’’ Citi says.
“Conversely, as investment demand falls as a share of mine supply, prices fall to incentivise jewellery consumption, disincentivise jewellery scrap supply, and disincentivise mine supply.
“Investment demand for gold can be viewed as an allocation of private and public sector wealth.’’
Citi says gold prices have dramatically outperformed their historical negative relationship with US interest rates since the third quarter of 2022, breaking a relationship that had held strong for most of the previous 15 years.
Citi says this is because rates “are but one driver of global gold investment demand (and they are correlated with only some of gold’s investment demand drivers)’’.
Moelis Australia said this week that there had been several recent broker upgrades for both short and long-term pricing for gold.
Moelis upgraded Genesis Minerals to a buy recommendation, saying it was now undervalued by about 35 per cent, while Alkane Resources was undervalued by 34 per cent.
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