Goldman Sachs maintains its target of gold price rising to $2700 per ounce by 2025, indicating that the increase in gold price has just begun, as central banks worldwide continue to buy gold. The Fed's rate cuts will encourage western capital to flow back into gold ETFs, providing important hedging value for investment portfolios to deal with geopolitical shocks.
With continuous inflow of funds into gold and silver ETFs, these two precious metals may still have even greater upside potential for the year.
Recently, Goldman Sachs analyst Robert Quinn and his team released a report stating that the rise in gold price has just begun, reiterating their bullish view on gold and maintaining a target of $2,700 per ounce by 2025. There are three reasons: central banks worldwide continue to buy gold, Fed rate cuts will prompt capital from the West to flow back into gold ETFs, and gold provides important hedging value for portfolios to counter geopolitical impacts.
Since mid-August, gold ETFs have seen an inflow of $3.3 billion, with no outflows observed in GLD and IAU in the past month. In its weekly report, the Goldman Sachs ETF Trading Desk stated:
"The latest information from the trading desk shows an increase in demand for investing in physical gold through ETFs like GLD, GLDM, IAU, and also an increase in demand for gold mining stocks like GDX."
Goldman Sachs also mentioned that recently, long positions in silver from hedge funds have been soaring. The current term structure indicates that the market is not yet truly tight, but the amount of physical silver that sellers and short positions can release is limited. After a certain price drop, silver will also rapidly rise. Due to silver's significantly higher volatility compared to gold, it would not be surprising for silver to outperform gold noticeably in the coming year.
Historically, the inflow of funds into US gold ETFs corresponded with gold prices. However, during the Russia-Ukraine conflict in 2022, their relationship began to reverse - as gold prices surged, gold ETF prices continued to fall, clearly decoupling from each other.
After several months, the price of gold enters the second phase, closely related to the net gold management futures positions of hedge funds. Many central banks worldwide conceal information on gold purchases, however, due to hedge funds being able to collect and trade 'non-public' central bank information, they have become a barometer and real-time indicator for central bank gold purchases.
The price of gold will continue to soar.
As mentioned above, gold trading volume continues to rise, with central banks globally continuing to purchase gold. Since the middle of 2022, the amount of gold purchased by central banks has tripled, and this structural trend will continue. Analyst Tyler Durden stated that it is not surprising for gold to set new highs every day.
And this is just the beginning, another reason for the imminent surge in gold prices is the recent 're-calibration' by the Federal Reserve. Powell initiated a loose cycle, with a significant 50 basis point rate cut, exceeding the gold market's expectations, resulting in a sharp price increase. Analyst Benjamin Picton of Rabobank stated,
On Friday, the price of gold hit a new high, closing well above $2600 per ounce, the upward momentum of gold is unstoppable, and the frequency of setting new highs is increasing. This is not surprising, as the Federal Reserve unexpectedly made a significant rate cut amidst a strong economy, excessive inflation, and high federal deficits, initiating a loose cycle.
In addition to central banks buying large amounts, the safe-haven qualities of gold have also made it popular recently. Gold provides important hedging value to investment portfolios to cope with geopolitical shocks, such as tariffs, concerns over U.S. government debt, U.S. recession risks, etc. Since 2015, gold has risen by 140%.
In addition to the fundamentals, there is a more urgent factor driving the rise in gold prices — not only are central banks and hedge funds crazily buying gold, but also the biggest driver of the rise in gold before the Russia-Ukraine conflict, ETFs, is now joining the battle! Since the amount held by ETFs will only gradually increase after the Fed's rate cut, this rise has not been fully priced in yet.
As mentioned above, in the past two years, as the price of gold rose, gold ETF holdings decreased, almost absent during the strong rebound of gold in the past two years. However, this year, with gold prices reaching historic highs, ETF fund inflows have turned positive.
Silver is also rising and may outperform gold in the next year.
Quinn stated that as gold ETFs rise, silver's long positions (which have been important for silver prices in the past two years) are also surging. Quinn observed the following characteristics of the silver market:
Before the September Fed meeting, speculative positions in silver futures surged. Goldman Sachs stated that between September 17th and September 20th, managed money and non-reportable net longs in silver increased by $2.6 billion, leading to an 8% price increase. This was the second largest increase in five years, with new longs being the sole driving factor.
Among them, managed funds dominate the market. From September 17th to September 20th, managed funds bought $2.3 billion worth of silver. Since the end of 2019, managed funds have only purchased over $2 billion worth of silver three times.
Due to the continuous tight supply of silver, coupled with the low real interest rates in the USA and the weakness of the US dollar, the price of silver is rising. Fresnillo, a Mexican metal mining company, emphasizes that the strong demand for silver is driven by the development of 5G, solar energy, autos, and nanotechnology. In addition, the real interest rate on the US five-year period has decreased by 8 basis points, and the US dollar index has fallen by 0.7%.
After the Fed cut interest rates, the price of silver continued to rise. From September 17th to September 20th, silver rose by 1.7%.
However, the fund flows show mixed performance. According to Goldman Sachs' futures strategist's CTA model, there is a trend of increased shareholding in silver in the market. Nevertheless, ETF holders are selling off while the price is rising, similar to their behavior with gold in the past, ceasing this practice only in recent months. Additionally, the three-month implied volatility has decreased, while the standardized 25 delta put/call options spread has increased.
In other words, the current term structure indicates that the market is not truly tense yet. In the circumstances mentioned above, the silver price from December to March has actually seen a decline. This coincides with several indicators - as of September 17th, the short positions of producers, processors, traders, and users are all below average levels. COMEX inventories have just dropped from a year high. Therefore, despite Fresnillo indicating strong silver demand, market participants still have the capacity to support more speculative long positions.
Of course, just like the surge in gold, the amount of physical silver that sellers and short positions can release is limited. After the price drops to a certain level, silver will quickly rise as well. The well-known financial blog Zerohedge believes that due to silver's higher volatility than gold, it is not surprising that silver significantly outperforms gold in the coming year.
