(Kitco News) - A nearly 11% drop in less than two weeks has attracted some buying momentum in the gold market, but one market analyst is warning investors that prices could still go lower. The question now is simply how low.
In his latest research note on gold, Bernard Dahdah, Precious Metals Analyst at Natixis, outlined three scenarios for how far gold prices could fall. The outlook comes as spot gold currently trades at $3,996.60 an ounce, up more than 1% on the day.
He noted that the ultimate floor for gold is just above production costs, around $2,000 an ounce, which is slightly above the mining sector’s average all-in sustaining costs of around $1,600 an ounce.
In his second scenario, Dahdah said that higher gold prices could lead to weaker demand among central banks and renewed investment outflows from gold-backed exchange-traded funds, which are now within 2% of their all-time highs. This environment could push gold down to $2,800 an ounce.
Finally, in his third scenario, if investment demand remains relatively unchanged but central bank demand cools, the market could test support around $3,450 an ounce.
While these three scenarios are possible, Dahdah said they are unlikely, as the market has undergone a significant transformation in recent years.
“I think at this point if we saw gold prices drop below $3,400 an ounce Chinese investors would try to buy as much as they could,” he said in an interview with Kitco News. “I think we would also see a solid rebound in jewelry demand.”
Although Dahdah has highlighted gold’s downside risks, he said that his base case is for prices to consolidate around current levels through 2026. He expects gold to average around $3,800 an ounce next year.
He added that he doesn’t see enough momentum in the marketplace for a sustainable move above $4,000 an ounce just yet.
“I think the drive through $4,000 was a bit of a short squeeze but now most of that has left the market. For gold prices to continue going up and up we need to see demand growth and we just don’t see that happening at these prices,” he said. “We also saw a lot of investors get excited about gold because they were expecting to see significant weakness in the U.S. dollar and the economy but it looks unlikely we are not going to see a doomsday scenario.”
Dahdah added that he expects central bank demand, while remaining elevated, to continue slowing as prices stay high. Analysts anticipate central banks will purchase about 900 tonnes of gold this year, slightly down from the roughly 1,000 tonnes bought in each of the past three years.
“At these prices, a billion dollars doesn’t get you as much gold as it once did,” he said. “Central banks will continue to buy, but they will be buying less.”
Although Natixis is relatively neutral on gold heading into the new year, Dahdah said he sees more risks to the upside than the downside. He expects investment demand to remain the main driver of the gold market through 2026.
He added that any volatility in the bond market could prompt investors to shift away from short-term money market funds and potentially push gold prices 10% higher.
“It doesn’t take a lot of money from the bond market to have a significant impact on gold,” he said. “With all the uncertainty in the marketplace and rising U.S. government debt, this is a scenario investors should be aware of.”
