Gold prices could soar to $3,000 per ounce, and oil to $100 per barrel within the next 12 to 18 months subject to any one of three possible catalysts, according to Citi.
Gold, which is currently trading at $2,016, could surge by about 50%, if central banks sharply ramp up purchases of the yellow metal, a possible stagflation, or in case of a deep global recession, Aakash Doshi, Citi’s North America head of commodities research, told CNBC.
Central bank’s gold rush
“The most likely wildcard path to $3,000/oz gold is a rapid acceleration of an existing but slow-moving trend: de-dollarization across Emerging Markets central banks that in turn leads to a crisis of confidence in the U.S. dollar,” Citi analysts including Doshi wrote in a recent note.
That could double central bank’s gold purchases, challenging jewelry consumption as the largest driver of gold demand, Doshi elaborated.
Central banks’ gold purchases have “accelerated to record levels” in recent years, as they seek to diversify reserves and reduce credit risk, Citi said. China and Russian central banks are leading gold purchases, with India, Turkey, and Brazil, also increasing bullion buying.
The world’s central banks have sustained two successive years of more than 1,000 tons of net gold purchases, the World Gold Council reported in January.
“If that goes again [to] double very quickly to 2,000 tons, we think that would be actually very bullish for gold,” Doshi told CNBC via phone.
A global recession?
Another trigger that could drive gold to $3,000 would be a “deep global recession” that could spur the U.S. Federal Reserves to cut rates rapidly.
“That means the brakes have been cut, not to 3%, but to 1% or lower - that will take us to $3,000,” Doshi said, noting that this is a low probability scenario.
Gold prices tend to share an inverse relationship with interest rates. As interest rates dip, gold becomes more appealing compared to fixed-income assets such as bonds, which would yield weaker returns in a low interest rate environment.
The Fed benchmark interest rate has been between 5.25% and 5.5% since July 2023, the highest since January 2001 when it shot to 6% following the dot-com bubble burst. Markets expect the Fed to cut rates in May or June.
Stagflation — an increasing inflation rate, a slowing economic growth and rising unemployment — could be another trigger, though Doshi said there’s a “very low probability” of such a scenario.
Gold is perceived as a safe haven and tends to perform well in periods of economic uncertainty when investors move away from the riskier assets such as equities.
These three potential triggers aside, Citi maintains that their base case for bullion is $2,150 in the second half of 2024, and the price of gold to average a little over $2,000 in the first half. A new record could be reached towards the end of 2024, Doshi added.
Oil at $100?
Another wildcard scenario highlighted in Citi’s report was for oil prices to hit triple digits again.
The catalysts for oil to hit $100 per barrel include higher geopolitical risks, deeper OPEC+ cuts and supply disruptions from key oil producing regions, Doshi said.
The ongoing Israel-Hamas war has not hit oil production or exports, with the only significant impact being the Houthi attacks from Yemen on oil tankers and other ships traversing the Red Sea.
Major oil producer Iraq has been impacted by the conflict and any further escalation could hurt other major OPEC+ suppliers in the region, Citi said.
Recent developments show that tensions have been rising on the border between Israel and Lebanon, raising fears that the war in Gaza could spread elsewhere in the Middle East.
Doshi said Iraq, Iran, Libya, Nigeria and Venezuela are vulnerable to supply disruptions, with steeper U.S. sanctions policy on Iran and Venezuela potentially on the cards.
Other geopolitical risks such as Russian oil supplies, should Ukraine attack Russian refineries with drones, cannot be ruled out, Citi’s analysts wrote. Doshi maintained that their base case for oil stands at around $75 per barrel for the year.
Global benchmark Brent’s April futures were trading at $83.56 a barrel, while the U.S. West Texas Intermediate March futures stood at $79.13 per barrel.
CNBC