Goldman sees potential for gold prices to rise above $3,000 amid geopolitical risks. By Investing.com

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In 2024, gold prices rose to new record levels, with the yellow metal surpassing $2,400 per ounce last month on increased global demand amid economic and geopolitical uncertainties.

Notably, strategists at Goldman Sachs believe there is further upside room for the safe metal, saying it could potentially cross $3,000 by the end of the year.

Gold prices are rising due to geopolitical unrest and demand from central banks

One of the main drivers of this price increase is strong demand for gold from global central banks and Asian households.

In China, economic recovery from the pandemic is challenging, and a depreciating yuan, which has lost about 5% against the US dollar over the past year, is making gold even more expensive for local consumers.

Despite this, both Chinese consumers and the People’s Bank of China (PBOC) continue to eagerly pursue gold.

The PBOC has increased its gold reserves for 17 consecutive months, with a 16% increase in its gold holdings during this period, as reported by the World Gold Council. In March alone, the PBOC added 160,000 ounces of gold to its reserves.

Similarly, countries like Turkey, India, Kazakhstan and some in Eastern Europe have been active gold buyers this year.

This accumulation reflects a broader trend among global central banks to diversify their reserves and reduce their dependence on the US dollar.

Gold prices took a significant pullback in late April, but bullish sentiment returned this week after Federal Reserve policymakers hinted that rate cuts could be on the horizon.

At its latest policy meeting on Wednesday, the Fed maintained its interest rate stance, as widely expected. The policy statement continued to reflect previous economic assessments and guidance, and suggested conditions that could lead to a reduction in borrowing costs.

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Fed Chairman Jerome Powell said any future interest rate decisions would be data-driven, but noted that a rate hike is unlikely at this time.

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This reassurance from Powell, who effectively ruled out further rate hikes, helped keep gold prices above $2,300. Lower interest rates further increase gold’s appeal because they typically lower returns on fixed-income assets such as bonds.

Meanwhile, geopolitical tensions, especially in the Middle East, have also increased investor interest in the precious metal. Gold is considered one of the oldest safe havens and sees strong demand during times of geopolitical unrest and wars.

Goldman Sachs says gold prices could top $3,000

Citing robust demand for gold from emerging market (EM) central banks and Asian households, Goldman Sachs strategists maintained their baseline projection that the precious metal will rise to $2,700 per troy ounce by the end of the year, marking an increase of 17% reflects.

Using their model, which incorporates previous estimates of the elasticity of gold supply and demand, Goldman strategists also see the potential for even higher gold prices under certain conditions.

Specifically, they predict that if US financial sanctions are intensified at a pace similar to that seen since 2021, gold prices could rise another 16% to $3,130 per troy ounce “due to additional central bank purchases of 7Mtoz per year” , they wrote.

“Such an increase in our U.S. financial sanctions index would be akin to the hypothetical addition of roughly two or more U.S. financial sanctions against China or six financial sanctions against India,” strategists said.

In a second scenario, Goldman estimates that if the US 5-year Credit Default Swap (CDS) spread widens by one standard deviation (13 basis points), gold prices could rise another 14% to $3,080 per troy ounce, driven by central banks buy another 6 million troy ounces of gold every year.

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“To be clear, the geopolitical, fiscal and financial prospects, and their exact impact on central bank gold demand and gold prices, are all highly uncertain. That said, our exercise underlines gold’s hedging value against adverse geopolitical or financial scenarios, in which equity bond portfolios would likely suffer,” strategists added.

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