The gold rush, which has pushed the price above $3300 an ounce, is starting to distort the global economy with spending on the metal rising to an estimated 0.5% of the world’s gross domestic product (GDP), a 400% increase on 20 years ago.
That calculation from Citi, an investment bank, is one of the startling findings in a report which said that the gold price should remain elevated through the September quarter but possibly start ease towards the end of the year.
Gold bars in a Korean bank. (Photo by Jung Yeon JE/AFP via Getty Images)
“Gold demand is firing on all cylinders at present, with 0.5% of world GDP currently being spent on gold, the highest in 50 years of data,” Citi said.
“Extremely strong investment demand for bars and coins is being driven by the 3Ds (deterioration in U.S. and global growth, debasement of the U.S. and Chinese currencies, and diversification away from the dollar).
“Investment demand is broad bases across all reported categories (retail, exchange traded funds, over the counter sales and central bank buying).
Household wealth held in jewelry, bars and coins has risen to an all-time high of 3%, doubling over the past five years, Citi said.
In terms of regional household wealth, the bank said that in India the share of gold had risen from between 7%-and-9% to between 15%-and-18% over the last three years.
The bank estimates that spending on gold is currently running at between $350-and-$400 billion a year.
Best Conditions In 50 Years
The bank said gold miners are enjoying their most profitable conditions in 50 years with high-cost miners relishing a $2000 per ounce gap between the five-year forward gold price and the 90th percentile of the all-in mining cost curve.
Another measure of the gold boom noted by Citi in its latest gold market outlook report is that central banks have doubled the gold share of their foreign reserves to 40%, the highest in 30 years.
The bank expects gold price to consolidate around their current level in the second half of the year as the world digests U.S. tariff policy, while geopolitical risks remain high and the Indian and Chinese economies remain strong.
Gold bars
“We expect some range trading opportunities between $3100/oz and $3500/oz, up from $3000/oz and $3300/oz in our most recent publication,” Citi said.
Over the longer term the bank turns cautious with two factors possibly weighing on the five-year forward price curve of $3600/oz-to-$3700/oz.
The first negative factor is that the potential for price drivers of the past three years, including geopolitical uncertainty start to ease while pro-growth policies develop in the U.S. along with further interest rate cuts.
The second factor which might weigh on the gold price is that the metal has simply run hard for more than years with households loaded up with gold to 3% of net worth, the highest in half a century.
“In this way, high prices could well be the cure for high prices,” Citi said.
