Gold’s Next Move? Why These Buyers Hold the Key.

A refiner stacks newly cast gold bullion at a smelter in Sydney in April. (DAVID GRAY/AFP via Getty Images)

When it comes to gold prices, demand from a few key players makes all the difference, according to a new note from Goldman Sachs. That is good news for the gold rally because both have been big buyers lately, and there is little reason to assume they will change course.

Gold is having a great year, with prices up more than 27% so far. On Monday, the precious metal was down about 0.1% to $3,380 per ounce in early futures trading on Comex, but still only about 3% below the record high set in late July.

The rally may have room to run, according to Goldman, whose current forecast calls for gold prices in London to hit $3,700 by the end of 2025 and $4,000 by mid-2026. Gold closed at $3,336 an ounce in London on Friday.

Gold prices largely reflect demand from a few critical constituencies, such as central banks and long-term investors, who buy for hedging or political reasons and aren’t especially price sensitive, Goldman analyst Lina Thomas said in a note Sunday. She estimated that for every 100 tonnes of net purchases by those groups—she called them “conviction buyers”—the price of gold typically rises 1.7%.

Thomas contrasted conviction buyers with “opportunistic buyers,” such as households in developing nations like China and India, who tend to buy gold jewelry and other items as a store of wealth. Opportunistic buyers jump into the market when gold prices fall but also hold off when prices soar. As a result, their demand tends to damp gold’s price volatility but doesn’t necessarily set its direction.

It isn’t hard to see the impact of central banks and exchange-traded funds in gold’s latest rally. While central banks flipped from selling gold to buying it following the 2008-2009 financial crisis, Goldman noted, the pace only picked up after the U.S. froze Russia’s reserves of U.S. and European bonds following the 2022 invasion of Ukraine. Emerging market “central banks responded by buying gold as the one reserve asset that cannot be frozen if held domestically,” wrote Thomas.

Gold purchases by ETFs tend to reflect demand from long-term investors in the U.S. and Europe. Buying tends to decline when interest rates rise because gold competes with bonds as a haven asset. Gold offers no cash flows, so higher rates make bonds comparatively more attractive.

While ETF investors sat out much of last year’s gold rally, this year they have been buying in earnest. Investors have poured a net $23 billion into gold ETFs, according to FactSet, including nearly $10 billion into the market’s most popular option, the SPDR Gold Shares.

Of course, even if central banks and long-term investors have been driving gold demand so far, the question remains, what will happen later this year and next? While Goldman’s bullish price forecast suggests additional buying, Thomas’s note doesn’t address the question directly.

At this point, however, it is hard to identify factors that would prompt the conviction buyers to change course. Neither the risk of financial crises, nor the need to keep reserve assets safe from international sanctions, has abated. If anything the need for haven assets has increased thanks to President Donald Trump’s from-the-hip, love-it-or-hate-it leadership style.

And it seems unlikely that long-term investors will change course after beginning to pile into gold ETFs, especially with U.S. interest rates now set to decline, if gradually, over the next year.

Write to Ian Salisbury at ian.salisbury@barrons.com