Gold keeps setting new standards

Gold has experienced parabolic gains this year with a rise of more than 60%. Macroeconomic and geopolitical uncertainties are likely to remain conducive to further gold demand. We maintain a positive outlook on the metal, and have raised our 12-month price target to USD 4,600 per ounce.

Over the last three years, gold’s rise has been spectacular, surging more than 180% since mid-October 2022. More recently, the metal has rallied 19% in just the six weeks since we last analysed the metal’s diversification properties within a portfolio. What is driving this momentum? The short answer is that the current macroeconomic and geopolitical backdrop continues to support rising gold demand. We see three reasons for gold’s continued gains.

First, in the US, the Federal Reserve is expected to continue cutting interest rates at a time when inflation is still relatively high, lowering US real yields. In the near-term, some of the attraction of owning gold may be explained by fears that the cost of US import tariffs will filter into consumer prices over the months ahead. Specifically, we expect US core Personal Consumption Expenditure (PCE) to remain above 3% - exceeding the Fed’s target - through the first six months of 2026. The US central bank has clearly signalled that, faced with a choice between its dual - job and price stability - mandate, it sees a stalling labour market as a greater threat to the economy than inflation. As the Fed lowers rates to support employment, non-yielding assets become more attractive, prompting private investors to look for a form of portfolio insurance against inflation and monetary ‘debasement,’ as currencies see their purchasing power eroded.

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This demand from private investors is typically visible in rising inflows into gold Exchange Traded Funds (ETFs). This has been a key variable for gold prices this year. September saw the largest-ever one-month inflow into physically-backed gold ETFs, driven primarily from the US and Europe. The process may be in its early stages. European investors were net sellers of gold ETFs between 2022 and 2024, with flows only turning positive this year. Meanwhile, Asian ETF demand, which was strong until May, was relatively stable in the third quarter. This demand could accelerate if US-China trade tensions worsen towards the year end. Despite the fast pace of inflows, total ETF gold holdings remain 12% below their 2020 peak.

Despite the fast pace of inflows, total ETF gold holdings remain 12% below their 2020 peak

Central banks still create a higher gold ‘floor’

Second, geopolitical tensions have driven a structural increase in demand from public investors, in other words, central banks and sovereign wealth funds. We believe that both the direction and magnitude of central bank purchases are significant. From 1980 to 2005, central banks consistently sold gold to cut their share of reserves from nearly 30% to 5%. Over this period, gold experienced lower price ceilings and fell cumulatively by 60%. Allocations remained relatively unchanged until 2008, when central banks began raising their holdings, supporting gold prices. Reserve allocations have already risen ten percentage points over the past decade, and these institutions may remain nervous about US government financial sanctions, broader geopolitical risks and unpredictable tariff policies under the Trump administration. Over many centuries, gold has offered - and continues to offer - currency-like characteristics: it serves as a medium of exchange, a unit of account and a store of value. This is particularly attractive today when US fiscal uncertainties pose risks to the value of debt instruments, in other words those sovereign bonds typically held by central banks as their main reserve asset. As gold’s value will either be lift unaffected by fiscal uncertainties, or benefit in the context of broad US dollar depreciation, we believe there is still scope for central banks to further diversify their reserve holdings in gold.

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Third, rising demand coincides with historically flat supplies of gold. Unlike crude oil, gold production cannot simply be increased to meet rising demand. Mined supplies of gold have weakened, but historically supplies are not very volatile. Scrap or recycled supplies, which account for around 30% of the global market according to the World Gold Council, have risen over the past year, but not sufficiently to account for increased demand.

Gold is not the only precious metal to have rallied

Gold is not the only precious metal to have rallied. Silver prices have outpaced gold’s gains with a rise of around 90% this year, following ETF inflows as well as industrial applications in alternative energy technologies. Also like gold, silver supply is tight, and investors do not yet know whether silver, like gold, will remain exempt from US tariffs. Platinum’s more than 75% gains this year have followed three years of undersupply, and the broader rise in demand from investors and jewellery markets for alternative precious metals.

Both silver and platinum have industrial and precious metal components and so are consumed, whereas gold is mostly stored as a precious, monetary asset. Central banks own gold, but do not necessarily have silver or platinum in their reserves. This also means that central banks can step in to provide gold when the market gets very tight – indeed the Bank of England had bars recast in the first half of the year to meet US size requirements. Silver and platinum are more prone to demand-supply mismatches, and so their prices tend to be more volatile: 12-month realised volatility for gold is at 16%, compared with 27% for silver and 29% for platinum. For these reasons, gold is a more appropriate portfolio diversifier.

What could undermine gold prices?

The first risk to today’s high gold prices is a more restrictive shift in the Federal Reserve’s monetary policy. This would see US real interest rates rise, a typically negative factor for gold. There are precedents. Following the Covid shock, the gold price peaked at USD 2,000 per ounce as US real yields fell to minus 100 basis points (bps). Gold then fell a cumulative 20% by the third quarter of 2022 as US real interest rates rose over 250 bps and the Fed began a rate hiking cycle. An even sharper 30% sell-off occurred between 2012 and 2013, when real yields rose from -60 bps up to +100 bps as the Fed flagged a slower pace of balance sheet expansion.

Today’s environment is different; the Fed funds rate is already high, with US real yields at +175 bps and the Fed has chosen to prioritise the labour market with rate cuts, rather than combat inflation. This decline in US real yields is likely to support gold.

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The second risk to today’s gold price is a sharp decline in jewellery demand. This market tends to move more slowly but still represents a sizeable share of annual demand. While jewellery demand has moderated, it has been offset by ETF and central bank demand.

Two of the larger central bank gold purchasers in recent years have been Turkey and Poland. Turkey’s central bank holds almost 50% of its reserves in gold, a level last seen in the 1980s. Poland holds around 24%, and plans to raise that to 30%. Any profit taking could lead to some gold price consolidation.

Our gold allocation remains above strategic levels

Earlier this year we anticipated that a soft US economic landing and still-strong global equity markets could see gold prices lag stocks as investors would see less need to hold gold as a recession haven. However, investors appear more interested in portfolio diversifiers against inflation risks, and concerns over the debasement of fiat currencies. The US economy’s growth is now softer, with little risk of recession, and equity markets continue to hit new highs. US stock markets remain supported by the capital expenditure in AI infrastructure, and higher earnings estimates, which have broadened into other sectors.

Given this environment, we believe that the factors are in place for gold’s positive trend to continue, and we have upgraded our 12-month price target to USD 4,600 per ounce from USD 3,900. In portfolios, our gold allocation remains above strategic levels. Short-term technical indicators suggest the market is significantly overbought, a signal that would point to possible price consolidation. However, technical signals are challenged by today’s more fundamental environment of accelerating demand and constrained supply.