This year, Gold prices have surged by 30% and have repeatedly hit historical highs. The market is concerned about who will be the main buyers of Gold at the current price level next year.

On December 13, Eastern Time, JPMorgan Analysts released the latest research report, continuing to be bullish on the Gold market, predicting that Gold prices may approach $3,000 per ounce by 2025. The analysts point out that under the backdrop of increasing macroeconomic uncertainty in 2025, Gold will continue to play an important hedging role.

The report believes that the rise in Gold may be driven by two main scenarios. First, macroeconomic turmoil may lead central banks and investors to increase their Shareholding in Gold; second, if the macro environment is relatively stable and the Federal Reserve starts a rate-cutting cycle, it could drive inflow into Gold ETFs. In the long term, the trend of Global central banks diversifying their dollar assets will also support the Gold market.

Macroeconomic conditions drive Gold demand.

Analysts believe that the future trend of the Gold market largely depends on the macroeconomic environment, which may present two distinctly different macro scenarios.

Scenario one: Macroeconomic turmoil.

If there are increased tariffs, escalating trade tensions, rising inflation, and a significant expansion of the USA budget deficit, central bank purchases, particularly from the People's Bank of China, may become the main source of Gold demand. The People's Bank of China recently announced that it re-purchased Gold reserves in November, marking the first increase since April.

Additionally, individual investors in China may regard Gold as a means of preserving value in the face of Exchange Rate fluctuations, while long-term investors may also increase their allocation to Gold against the backdrop of inflationary pressures and concerns about the devaluation of debt.

Scenario Two: The macro environment is relatively stable.

If the macro environment is relatively mild, market attention may turn to the Federal Reserve's interest rate cut cycle. In this situation, on one hand, Gold ETFs may attract more Inflow as the appeal of Money Market Funds declines. On the other hand, although the central bank's purchasing power may not be as extreme as in turbulent scenarios, Analysts believe that the structural shift towards USD diversification by central banks will continue.

Central Bank Gold Demand Remains Strong.

Although the amount of gold purchased by central banks in the third quarter of 2024 (including estimates of unreported activities) fell to about 186 tons, the total purchasing volume for the first three quarters of 2024 still reached approximately 694 tons. This figure represents a 17% year-on-year decrease but remains comparable to 2022 levels. More encouragingly, with the year-end approaching, there are signs of a rebound in central bank gold purchasing activities.

According to the latest Statistics from the International Monetary Fund (IMF), the net purchase volume of global central banks reached 60 tons in October this year, marking the highest monthly level in a year. Among them, India performed particularly well in October, adding 27 tons to its gold reserves, bringing its total purchases to 77 tons year-to-date.

Additionally, following a general rebound in central bank gold purchasing activities in October, China has returned to the market. The People's Bank of China added about 5 tons of gold in November 2024, marking the first purchase since halting buying in April 2024. Although last month's purchases are relatively mild compared to the average monthly purchase of nearly 18 tons from November 2022 to April 2024, it signifies China's resumption of increasing gold reserves amid a continuous decline in its holdings of US Treasury bonds.

Currently, about 23% of China's Forex reserves are in US Treasury bonds, significantly lower than the peak of 45% in 2010. In the future, China may further increase its gold reserves while reducing its holdings of US Treasury bonds.

Moreover, in recent years, the proportion of Gold in Global Forex reserves is undergoing a structural transformation. According to data from the International Monetary Fund (IMF), as of the third quarter of 2024, Gold's share in global official reserves has increased from about 15% at the end of 2023 to about 18%. This growth is attributed not only to the increase in Gold purchases but also to the rise in gold prices, which have increased by about 30% since the beginning of the year, enhancing the valuation of Gold reserves.

Among them, the USA, Germany, France, and Italy together hold about 0.164 million tons of Gold, accounting for nearly half of the global official Gold reserves, especially as the USA alone holds about a quarter of the world's Gold reserves. However, the Gold holdings of these four countries are significantly higher than those of other nations, which raises the global average level. If these four countries are excluded, the global Gold reserve proportion drops to about 11%.

Among the countries with large Forex reserves, China's Gold holding ratio is relatively low, making it a potential major Gold purchasing country in the future. As of the end of the third quarter of 2024, out of nearly 30 countries with Forex reserves exceeding 100 billion USD, 18 countries have a Gold holding ratio below 11%. If China increases its Gold reserve ratio by 1%, it would equate to an increase of about 400 tons in Gold purchases.

Besides China, the Gold purchasing behaviors of India, Japan, Saudi Arabia, Singapore, and other countries are also noteworthy, as these countries' increases in Gold reserves may reflect a broader trend of dollar diversification.

Chinese retail investor demand is rebounding.

Latest data shows that China's net import demand for unrefined Gold has rebounded in the past two months after experiencing a low in August. Although the import volume in October decreased by 11% year-on-year, slightly below 80 tons, it still marks a year-to-date year-on-year decline of 15%. China's retail Gold demand is influenced by various factors, including price performance, GDP growth, interest rates, Exchange Rates, the Real Estate market, the stock market, and demographics.

According to data from the World Gold Council, as of the third quarter of 2024, China's jewelry demand has decreased by 22% year-on-year, but the demand for investment bullion and coins has increased by 28% year-on-year, which has somewhat alleviated the pressure on overall demand. This phenomenon indicates that despite the sluggish jewelry market, investors' interest in Gold as an investment tool remains strong.

JPMorgan has pointed out that in terms of monetary policy, China's Politburo announced a shift to a moderately loose monetary policy this week, the first since 2008. Although specific details and timing have not yet been clarified, the government has committed to lowering interest rates and providing fiscal stimulus during the Central Economic Work Conference. Due to the interest rate cuts, the People's Bank of China purchasing Gold again, and the impact of the Renminbi Exchange Rates, JPMorgan expects China's consumers' desire to purchase Gold to remain strong.

However, the main risk lies in the possibility that stimulus measures could trigger a strong recovery in the Real Estate and stock markets, thereby diverting investment funds from Gold. Nonetheless, the exchange rate of the Renminbi remains a key factor, as Gold can serve as a means of value preservation against declining purchasing power.

During the past decade, periods of significant fluctuations in the Renminbi exchange rate were often accompanied by China's strong demand for Gold imports, including during the 2015/16 period, the 2018 trade war 1.0, and in 2022, which triggered the recent wave of gold purchases by China and the People's Bank.

Gold ETFs still have growth potential.

JPMorgan noted that the total holdings of Global Gold ETFs are currently about 3,200 tons (0.103 billion ounces); although this number is still about 18% lower than its previous peak, there remains substantial potential for growth. According to data from the World Gold Council, as of December 6, the holdings of Gold ETFs, valued at actual nominal value, are about 11% lower than in 2020.

Considering that there is still over 6 trillion USD in low-yield status within Global Money Market Funds, if the macroeconomic environment trends towards moderation by 2025 and investors start to refocus on the Federal Reserve's rate-cutting cycle, Gold ETFs could experience significant growth.

Historical Data shows that the changes in Gold ETF holdings are primarily driven by fluctuations in interest rates. When interest rates decline, the no-yield Gold becomes more attractive as a risk-free asset compared to Bonds and Money Market Funds, and vice versa. This means that if the Federal Reserve begins a rate-cutting cycle in 2025, it could stimulate demand growth for Gold ETFs.

Moreover, investors' demand for physical Gold may still be strong. Although Gold prices have risen this year, data from the World Gold Council shows that demand for Gold bars and coins in the first nine months of 2024 has only declined by about 2% year-on-year, indicating that investors' interest in physical Gold remains strong. If there are significant changes in the macro environment in 2025, especially with interest rate declines or other economic uncertainties, demand for physical Gold could further increase.

Additionally, by the end of the third quarter of 2024, the total amount of Gold held by investors was close to 49,300 tons, valued at approximately 4.2 trillion USD. The net non-commercial position for COMEX Gold is equivalent to about 980 tons of Gold, while total holdings in Global ETFs are about 3,200 tons, with private investors holding over 0.045 million tons of Gold bars and coins.

Currently, Gold accounts for about 2% of the investments in Global Equity, liquid fixed income (excluding Forex reserves), and alternative assets. Although this percentage has increased from 1.6% a few years ago, it remains on par with the historical peak of the Gold market in 2010/11. This indicates that Gold, as part of asset allocation, is gradually gaining more favor among investors.

Editor/new