Citi is optimistic that gold investment demand will rise to absorb all mine supply over the next 12 to 18 months, a new framework report shows.

This follows gold investment demand in China and Central Banks around the world which has risen to over 85% of mine supply during Q1, 2024.

“Looking ahead, we expect gold investment demand to rise to absorb almost all mine supply over the next 12-18 months, underpinning our base case for $2,700-3,000/oz gold during 2025,” Citi said in its research report titled ‘A Fundamental Framework for Gold’.

The increase in investment demand and prices comes from a forecast of the normalisation of US interest rates, driving Exchange-trades fund (ETF) demand higher in particular.

Citi’s research also found that gold prices have dramatically outperformed real rates since Q3 2022, owing to strong physical demand from China and Central Banks, while showing a steady rise of physical investment demand as the key determinant of gold pricing.

The report predicted that Chinese and global Central Bank buying is expected to continue at current run rates, underpinned by excess savings, weak property, weak private sector sentiment and de-dollarisation, respectively.

Citi noted various other developments that may support gold investment and drive gold outperformance relative to other asset classes over the next 6-18 months, including trade tariffs – stagflationary for the US initially, disinflationary globally –, fiscal policies consistent with inflating away US debt, potential US debt issues, and/or a substantial worsening Middle East conflict or other potential inflationary shocks.

Citi expressed hope that the framework in the report can help to rejuvenate gold investment and trading since many investors have avoided investing in gold because of the lack of an intuitive, regime-independent, fundamental framework that can stand the test of time.

“There has potentially never been a better time to publish this framework since gold’s bellwether relationship with US real interest rates has broken down quite spectacularly over the past 2 years, with gold reaching all-time highs despite high real rates,” the report said.

The research notes that at the core of the framework is the notion that investment demand – from both private and public sectors – taken as a share of gold mine supply is the primary driver of gold pricing. Gold investment demand in China and central banks has risen to 85% of mine supply during 1Q’24, and averaged more than 70% of mine supply over the past two years (3Q’22-1Q’24), up sharply from only 25% of mine supply over the three years prior.

The framework allows investors to contextualise, model, and forecast scenarios for the various physical gold market drivers and prices.

It notes that the increase in investment demand from China and global central banks has more than offset the negative investment demand impulse coming from higher US real interest rates, which has required gold prices to move to record highs to destroy jewellery demand and incentivize scrap supply.

The Report notes that the downside risk to the case forecasts is China’s retail demand being lower than anticipated owing to quotas on imports.

“Weaker central bank demand or a delay in the Fed normalising interest rates are also risks to the strong investment demand,” the report said.