Citigroup has issued a research report expressing a cautious stance on the short-term outlook for gold. The bank attributes this view to reduced investor buying interest, driven by ongoing tensions in the Strait of Hormuz and elevated energy prices, which have sparked market concerns about risk-off selling—a pattern consistent with gold's historical precedents.
While robust investment demand and a strong Chinese yuan have kept China's spending on gold imports near a historically high level of approximately $300 billion annually, supporting gold prices at elevated levels by historical standards, this has not offset the primary negative shift: a decline in investment demand. This downturn is particularly notable in India, and the bank suggests similar trends may be present in retail markets outside China as well.
Inflationary pressures stemming from the prolonged stalemate in the Strait of Hormuz have heightened market expectations for Federal Reserve interest rate hikes. This, in turn, is exerting downward pressure on gold prices through higher real interest rates and a stronger U.S. dollar. Consequently, Citigroup maintains a cautious near-term view on gold, setting a 0-3 month price target of $4,300 per ounce. The bank notes that a significant risk-off event could push prices substantially below this level.
Citigroup states that it will remain cautious on gold for as long as the Strait of Hormuz remains partially or largely closed, at least until the market fully prices in this factor. However, the bank ultimately seeks to establish long positions over a longer time horizon.
The bank anticipates that once tensions in the Strait of Hormuz eventually subside—its new base case now points to July—the current macroeconomic headwinds for gold, such as high real interest rates and a strong dollar, will ease, likely allowing gold prices to find a bottom and rebound.
In a non-base case scenario where the Strait of Hormuz remains closed for an extended period, leading to higher and more persistent energy prices, market concerns could shift from "inflation without recession" (given that U.S. high-frequency economic data remains broadly robust) to "stagflation." This situation represents a worst-case scenario for any central bank. Historically, during stagflationary periods, returns on stocks and bonds have been negative, while returns on precious metals have been significantly positive.
The latest first-quarter data from the World Gold Council shows strong demand for gold bars and coins, resilient jewelry demand, and a rebound in central bank purchases. Meanwhile, demand trends in the world's two largest gold consumer markets, China and India, have diverged due to contrasting local policy changes and currency movements.
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