(Kitco News) - The current pullback in gold prices is very temporary, as the Federal Reserve will deliver multiple rate cuts which will propel gold prices to $3,000 in the next 12 months, according to Max Layton, Global Head of Citigroup Commodities Research.
In an interview with Bloomberg TV earlier on Friday, Layton was asked how focused his team is on the role of the dollar in metals markets, including the potential impact of the interest rate path.
“We certainly think about that,” Layton said. “The house view is quite out of consensus, Citi Research's house view. We've got five Fed cuts this year, lowering rates into the end of the year, early next year, and that's certainly going to be, we think, the backbone of the next move higher in gold.”
Layton said Citi believes gold is the asset most leveraged to that kind of move in interest rates. “We've got it going to $3,000 over the next 12 months,” he said.
When asked about the market only fully pricing in one rate cut this year, and where that would leave gold prices, Layton acknowledged this would necessarily rein in their projections.
“Certainly, it would make us less bullish,” he said. “But the underlying drivers of gold are very physical at the moment, so we feel like there's support for these gold prices. Obviously, gold's broken the relationship with real rates of late, and that's been all about the colossal Chinese retail demand, I mean, off the charts.”
“I've never seen China on the bid at the highs and the dollar notional that they're putting into gold, we ballpark that it's roughly 40 to 50% of what would have otherwise gone into property,” he added. “It's a big shift from property spending into gold in retail in China. It mopped up about two-thirds of China’s mined supply in the last three or four months, really absorbing all the mine supply. That plus the central bank demand, and there's nothing left for the jewelry market.”
Asked whether Citi sees this outsized Chinese demand continuing at current levels, Layton said that was the most worrisome unknown in their view.
“That is the biggest downside risk to gold for us,” he said. “Ultimately, the government controls the quotas on the imports. The quotas aren’t published, and they could dry up if the government becomes unhappy with the transfer of wealth from perhaps consumption and retail into physical gold.”
Layton added that despite gold’s strong performance year to date, the attention he’s been seeing in the commodities space has been going to another metal.
“I would say overall, the action in commodities has been almost 95 to 99% copper,” he said. “From a client activity perspective, from what I hear about and I see, it's not so much been in gold.”
Moving forward, however, Layton expects that interest will shift toward the yellow metal. “I think there's a lot of room for gold,” he said. “Frankly, many people including ourselves, were scratching our heads as to what the new drivers were. And now they've become clear, that it's China, I think we're going to get a lot more interest in gold, because people can get their heads around it.”
In April, Citi updated their gold price forecast to $3,000 per ounce by 2025, making them among the most bullish in the industry.
“In the summer of 2019, I was in your studios calling for $2,000 an ounce as a base case over the next 12 months,” Aakash Doshi, Citi North America Head of Commodities Research said during an interview with Yahoo Finance on April 16. “Now we think $3,000 an ounce is in play over the next year or so.”
Doshi said investor demand is the “big driver” that will make this come to pass. “We think financial demand for gold is only catching up to what is strong physical [demand],” he said, referring to reports of burgeoning bar and coin sales. “That is a global trend, we've seen bar and coin demand surge since the pandemic, it's now above pre-COVID trend, and that we think represents a strong alternative fiat demand story.”
“Separately, we see the official sector, central banks in the emerging markets in particular, to buy a record amount of gold over the last several years, including over a thousand tons in 2024, which would be the third highest since 1967,” he said. “We think this physical demand is structural, it is strong, it is driven by a host of factors, and financial demand for gold is only catching up to that.”
“I would note that if there is a U.S. recession, which is not priced by markets right now, that could also be a further kicker towards $3,000 an ounce gold over the next six to 12 months,” Doshi added.
