【MACRO Insight】Gold market dynamics: growing demand and soaring prices

On Wednesday, the gold market hit a new high again, with gold prices breaking through the 2,780 mark at one point, and silver prices also continued to rise, reaching $34 per ounce, the highest level in more than a decade. Central bank purchases of gold have pushed up gold prices by more than 30% so far this year, and geopolitical tensions have focused investors on precious metals as safe-haven assets, with silver also rising 37% over the same period. Chris Vecchio, global co-head of macro at trading platform Tastylive, pointed out, "It's clear that both gold and silver have had very strong momentum in recent weeks and months, but we're really just in the early stages of a multi-year shift toward precious metals."

Investors are betting on precious metals in anticipation that the Federal Reserve and other central banks will continue to cut interest rates. In a low-rate environment, high-yielding assets like bonds become less attractive. In addition, precious metals are often considered a hedge against inflation. While U.S. inflation has recently fallen to the Fed's target level near 2%, there are still many pressures pushing prices higher in the long term, from the possibility of more tariffs to efforts to revive manufacturing.

Global gold demand rose about 5% in the third quarter, a record for the period, pushing turnover above $100 billion for the first time, according to the World Gold Council. The increase in gold demand - which totaled 1,313 tons - was supported by stronger inflows in the West, including more participation from high-net-worth individual investors, which helped offset weaker demand in Asian markets. Gold ETFs turned to inflows this quarter after a long period of outflows, the World Gold Council noted in a report released on Wednesday.

Gold prices have surged this year, rising more than 33% and hitting new highs. The jump was driven by strong central bank gold buying and increased demand from wealthy investors, and the recent gains were also helped by the Fed's policy shift. John Reade, chief market strategist at the World Gold Council, said that opaque over-the-counter gold buying is increasingly becoming an important force driving gold prices.

"There's been a shift in demand from OTC buying primarily in emerging markets -- high net worth individuals -- to more OTC buying in the West," Reed said. OTC trades are conducted through dealers or directly between buyers and sellers, not through exchanges. Gold has risen every month this year except for a small pullback in January and flat prices in June. "Corrections have been small and short-lived, which clearly shows fear of missing out (FOMO) buying," Reed said in the interview.

The World Gold Council expects gold allocations to increase as a global rate-cutting cycle begins, with geopolitical uncertainty - particularly next week's tense US presidential election - adding to investors' reasons to seek safe-haven holdings. Inflows were key to gold's 13% rise in the third quarter, with total demand for gold ETFs, bars and coins reaching its highest level since the outbreak of the Russian-Ukrainian conflict in 2022.

Reed said that fiscal concerns may become a more important driver of gold prices in the future, especially regarding the ballooning U.S. government debt. Reed said that some organizations and individuals, including the International Monetary Fund, have expressed concerns, "saying that the U.S. government deficit is too large and really needs to be addressed. This is the main attraction for institutions to increase their gold holdings through OTC transactions."

Goldman Sachs analysts recently said that central bank gold purchases will remain "structurally high" with a target of $2,900 an ounce. Goldman Sachs has published reports bullish on gold several times, and the bank expects gold prices to reach $2,900 an ounce by early 2025, up from its previous forecast of $2,700. Much of this optimism is attributed to a surge in gold purchases by central banks, especially in emerging markets.

Goldman Sachs further noted that its expectations for central bank demand in the London OTC market have increased fivefold since the Russia-Ukraine conflict, resetting the relationship between gold prices and interest rates. The US investment bank's "still bullish" forecast also takes into account the role of speculators in gold as a safe haven in the event of rising gold prices, especially before the US election on November 5. Although there may be a risk of a decline in gold prices due to a decline in speculative positions in gold after the election, the bank stressed that holding long gold positions has important hedging value amid potential trade tensions and financial risks. Goldman Sachs expects gold prices to rise by about 10% to $3,000 an ounce by December 2025.