After a 30% surge this year, who will still buy gold next year? JPMorgan Chase: Global central banks, Chinese "aunties," and Western gold ETFs all have room to grow

This year, gold prices have surged by 30% and repeatedly set historical highs. The market is concerned about who will be the main buyers of gold at the current price level next year.

On December 13th, Eastern Time, JPMorgan analysts released the latest research report, maintaining a bullish outlook on the gold market, predicting that gold prices could approach $3,000 per ounce by 2025. Analysts pointed out that in 2025, amid increasing macroeconomic uncertainty, gold will continue to play an important hedging role.

The report suggests that the rise in gold prices may be driven by two main scenarios. One is macroeconomic turmoil, prompting central banks and investors to increase their gold holdings; the other is a relatively stable macro environment, where the Federal Reserve begins a rate-cutting cycle, leading to inflows into gold ETFs. In the long term, the trend of global central banks diversifying their dollar assets will also support the gold market.

Macroeconomic Environment Driving Gold Demand

Analysts believe that the future trend of the gold market largely depends on the macroeconomic environment, which could lead to two distinctly different macro scenarios:

Scenario 1: Macroeconomic Turmoil

If there are increases in tariffs, escalating trade tensions, rising inflation, and a significant expansion of the U.S. budget deficit, central bank purchases, especially by the People's Bank of China, may become the main source of gold demand. The People's Bank of China recently announced the repurchase of gold reserves in November, marking the first increase since April.

Additionally, Chinese retail investors, in the face of exchange rate fluctuations, may view gold as a means of preserving value, while long-term investors may further increase their allocation to gold amid concerns over inflationary pressures and debt devaluation.

Scenario 2: Relatively Stable Macroeconomic Environment

If the macro environment is relatively mild, market attention may shift to the Federal Reserve's rate-cutting cycle. In this case, on one hand, gold ETFs may attract more inflows as the appeal of money market funds declines. On the other hand, although central bank purchases may not be as extreme as in the turmoil scenario, analysts believe that the structural shift towards dollar diversification by central banks will continue.

Strong Continued Demand for Gold from Central Banks

Although central bank gold purchases (including estimated unreported activities) fell to about 186 tons in the third quarter of 2024, the total purchase volume for the first three quarters of 2024 still reached approximately 694 tons. This figure, while down 17% year-on-year, remains comparable to 2022 levels. More encouragingly, as the year-end approaches, there are signs of a rebound in central bank gold purchasing activities.

According to the latest statistics from the International Monetary Fund (IMF), the net purchase volume of global central banks reached 60 tons in October this year, setting a new monthly high for the year. Notably, India performed particularly well in October, increasing its gold reserves by 27 tons, bringing its total purchases to 77 tons year-to-date.

Additionally, following a general rebound in central bank gold purchasing activities in October, China has returned to the market. The People's Bank of China added approximately 5 tons of gold in November 2024, marking its first purchase since halting in April 2024 Although last month's purchases were relatively moderate compared to the average monthly purchase of nearly 18 tons from November 2022 to April 2024, it marks China's resumption of increasing its gold reserves against the backdrop of a continuous decline in U.S. Treasury holdings.

Currently, about 23% of China's foreign exchange reserves are in U.S. Treasuries, significantly lower than the peak of 45% in 2010. In the future, China may further increase its gold reserves while reducing its holdings of U.S. Treasuries.

Moreover, in recent years, there has been a structural shift in the proportion of gold in global foreign exchange reserves. According to data from the International Monetary Fund (IMF), as of the third quarter of 2024, the proportion of gold in global official reserves has risen from about 15% at the end of 2023 to about 18%. This increase is attributed not only to the rise in gold purchases but also to the approximately 30% increase in gold prices since the beginning of the year, which has enhanced the valuation of gold reserves.

Among them, the United States, Germany, France, and Italy collectively hold about 164,000 tons of gold, accounting for nearly half of the global official gold reserves, with the United States alone holding about a quarter of the world's gold reserves. However, the gold holdings of these four countries are significantly higher than those of other countries, raising the global average level. Excluding these four countries, the global gold reserve proportion drops to about 11%.

Among countries with large foreign exchange reserves, China's proportion of gold holdings is relatively low, making it a potential major gold purchasing country in the future. As of the end of the third quarter of 2024, among nearly 30 countries with foreign exchange reserves exceeding $100 billion, 18 countries have a gold holding proportion of less than 11%. If China increases its gold reserve proportion by 1%, it would be equivalent to an increase of about 400 tons in gold purchases.

In addition to China, the gold purchasing activities of countries such as India, Japan, Saudi Arabia, and Singapore are also noteworthy, as these countries' actions to increase gold reserves may reflect a broader trend of diversifying away from the dollar.

Demand from Chinese Retail Investors Recovers

Latest data shows that China's net import demand for unrefined gold has rebounded in the last two months after hitting a low in August. Although the import volume in October decreased by 11% year-on-year, slightly below 80 tons, it still marks a 15% year-on-year decline from the beginning of the year. Chinese retail gold demand is influenced by various factors, including price performance, GDP growth, interest rates, exchange rates, the real estate market, the stock market, and demographics.

According to the World Gold Council, as of the third quarter of 2024, China's jewelry demand decreased by 22% year-on-year, but the demand for investment gold bars and coins increased by 28% year-on-year, which somewhat alleviated the pressure on overall demand. This phenomenon indicates that despite the sluggish jewelry market, investors' interest in gold as an investment tool remains strong.

JP Morgan pointed out that in terms of monetary policy, China's Political Bureau announced a shift to a moderately accommodative monetary policy this week, the first since 2008. Although specific details and implementation timelines have not yet been clarified, the government has committed to interest rate cuts and fiscal stimulus at the Central Economic Work Conference Under the influence of interest rate cuts, the People's Bank of China buying gold again, and the exchange rate of the renminbi, JPMorgan Chase expects Chinese consumers' desire to purchase gold to remain strong.

However, the main risk lies in the possibility that stimulus measures could trigger a strong recovery in the real estate and stock markets, thereby diverting investment funds away from gold. Nevertheless, the renminbi exchange rate remains a key factor, as gold can serve as a means of preserving value against declining purchasing power.

In the past decade, periods of significant fluctuations in the renminbi exchange rate have often been accompanied by strong demand for gold imports in China, including during the 2015/16 period, the trade war 1.0 in 2018, and 2022, which sparked the recent wave of gold purchases by China and the People's Bank of China.

Gold ETFs Still Have Growth Potential

JPMorgan Chase points out that the current holdings of global gold ETFs are approximately 3,200 tons (103 million ounces). Although this figure is still about 18% lower than the previous peak, there remains significant potential for growth. According to data from the World Gold Council, as of December 6, the holdings of gold ETFs, when calculated at nominal value, are about 11% lower than in 2020.

Considering that there are still over $6 trillion in low-yield status within global money market funds, if the macroeconomic environment becomes milder by 2025 and investors begin to refocus on the Federal Reserve's interest rate cut cycle, gold ETFs could see significant growth.

Historical data shows that changes in gold ETF holdings are primarily driven by interest rate fluctuations. When interest rates decline, the appeal of non-yielding gold as a risk-free asset increases relative to bonds and money market funds, and vice versa. This means that if the Federal Reserve begins its interest rate cut cycle in 2025, it could stimulate demand growth for gold ETFs.

Moreover, investor demand for physical gold may remain strong. Despite the rise in gold prices this year, data from the World Gold Council shows that demand for gold bars and coins in the first nine months of 2024 has only decreased by about 2% year-on-year, indicating that investor interest in physical gold remains robust. If there are significant changes in the macro environment in 2025, especially with declining interest rates or increased economic uncertainties, demand for physical gold may further increase.

Additionally, as of the end of the third quarter of 2024, the total amount of gold held by investors is close to 49,300 tons, valued at approximately $4.2 trillion. The net non-commercial position of COMEX gold is equivalent to about 980 tons of gold, while global ETF holdings are about 3,200 tons, and private investors hold more than 45,000 tons of gold bars and coins.

Currently, gold accounts for about 2% of global investments in stocks, liquid fixed income (excluding foreign exchange reserves), and alternative assets. Although this proportion has increased from 1.6% a few years ago, it remains on par with the historical peak of the gold market in 2010/11 This indicates that gold, as part of asset allocation, is gradually gaining more favor among investors