(Kitco News) –Because gold is not consumed, but instead accumulated over time, prices are primarily driven by changes in ownership rather than the traditional supply and demand dynamics that govern other commodities, according to analysts at Goldman Sachs.
In a recent research note, the analysts wrote that gold prices move more like prime Manhattan real estate than barrels of oil.
“You can't pump gold — but you can bid it out of someone's hands,” they wrote. “Gold doesn't get used — it changes hands and gets repriced. The gold price reflects who is more willing to hold it and who's willing to let go.”
This makes the yellow metal very different from other commodities, where price reflects supply and demand based on consumption, and high prices can depress demand.
“Its market clears through changes in ownership, not production-versus-use balances,” the analysts noted.
Goldman Sachs identified two key groups of buyers. “Conviction buyers” include central banks, ETFs, and speculators, who buy regardless of price, while “opportunistic buyers” include households and individuals in emerging markets like India and China who buy only when the price is attractive.
The analysts said that while the second group creates the floor under gold prices during sell-offs, the conviction buyers are the ones who set the trend – not unlike the Manhattan real estate market.
“The total number of apartments is largely fixed, and the small amount of new construction each year is not what drives prices,” they wrote. “What matters is the identity of the marginal buyer.”
Manhattan also has two equivalent groups of buyers: The conviction buyers who can pay the price and who will live there regardless of cost, and the opportunistic buyers who will live in New Jersey or the surrounding boroughs and will only buy at the right price.
Nearly all of the 220,000 metric tons of gold that have been mined in human history still exists, with most of it held in vaults, central bank reserves, or jewelry, while new annual production adds barely 1% to the existing stock. In both markets – Manhattan real estate and gold – price changes are driven not by the availability of new supply, but by conviction buyers bidding up the existing assets.
Goldman analysts have determined that these conviction flows explain approximately 70% of gold monthly price movement, with every 100 tons of net purchases by conviction buyers boosting the gold price by about 1.7%.
In mid-July, Goldman Sachs reaffirmed their forecast for gold to reach $3,700 per ounce by year-end before rising to $4,000 by mid-2026, with central bank and ETF inflows supporting lofty prices – along with major off-balance sheet buying.
The investment bank wrote that the clearing of speculative positions has created space for structural buying, adding that inflows into gold ETFs and strong purchases by central banks are emerging as a new pillar of demand.
Goldman Sachs also reiterated its recommendation to go long gold, adding that the continued strength of some markets' off-balance sheet gold purchases is providing support for global gold prices.
