Central Bank Gold Demand to Remain Firm in 2025: Analysts

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Chinese gold demand has cooled, but analysts look for central banks to continue providing support in 2025.

Gold prices rose by more than 26% in 2024, making for the strongest annual gain in over a decade; in fact, the precious metal notched 40 record highs over the year.

Driving the rally was a combination of U.S. Dollar weakness through the first part of the year and, more recently, central bank and institutional demand from China.

"Strong gold demand in China was one of the key narratives in the gold market in 2024," says Hamad Hussain, Economics economist Hamad Hussain. "Recent macroeconomic and geopolitical developments suggest that China’s gold demand will be even stronger in 2025 than we first thought."

Capital Economics expects the U.S. dollar to strengthen and Treasury yields to rise next year, which would typically point to lower gold prices.

However, "we still think that support from strong Chinese demand, amongst other non-traditional drivers, will result in gold prices reaching $2,750 by end-2025," says Hussain. "In a nutshell, all roads lead to gold for many Chinese investors."

Central bank gold reserves can significantly influence the price of gold due to their role as major players in the global gold market.

"Since Russia’s invasion of Ukraine in 2022, central banks have been buying gold at a brisk pace — roughly triple the amount prior," says a research note from Goldman Sachs. "Gold is our strategists' preferred near-term long (the commodity they most expect to go up in the short term), and it’s also their preferred hedge against geopolitical and financial risks."

Goldman Sachs Research expects the buying spree to persist amid concerns about US financial sanctions and the growing US sovereign debt burden, setting a $3,000 per ounce price prediction on gold for 2025.

Analysis from UBS says to expect central bank demand to remain robust in the coming year.

"We expect central bank demand to remain solid - we forecast purchases of around 900 metric tons in 2025 - driven by diversification and de-dollarization trends," says Wayne Gordon, a Strategist at UBS.

Investors closely monitor central bank actions as increased gold purchases by central banks indicate a desire to diversify away from fiat currency.

On the other hand, reduced gold holdings or sales can signal confidence in economic stability, potentially leading to lower gold prices

As of August 2024, the top three countries by central bank gold holdings are:

United States: 8,133.5 metric tons, comprising 72.4% of its foreign exchange reserves.

Germany: 3,351.5 metric tons, accounting for 71.5% of its foreign exchange reserves.

Italy: 2,451.8 metric tons, representing 68.3% of its foreign exchange reserves. According to Rendite Passive's overview of the numerous trading platforms in Italy, unlike some countries that occasionally sell gold to meet fiscal needs, Italy has maintained its reserves without significant reductions.

The Italian Constitution provides additional safeguards against the sale of national gold reserves, reflecting its cultural and economic significance.

As of August 2024, China ranks sixth globally in central bank gold holdings, with approximately 2,264.3 metric tons of gold, constituting about 4.9% of its total foreign exchange reserves.

In recent years, China has been actively increasing its gold reserves as part of a broader strategy to diversify its assets and reduce dependence on foreign currencies like the U.S. dollar.

This accumulation reflects China's efforts to enhance its monetary policy flexibility and support its growing economy amidst global uncertainties.

China's gold holdings are, therefore, relatively small as a percentage of total GDP, indicating significant scope to expand diversification.

The local gold price in China has experienced a record-smashing year so far in 2024.

The RMB gold price – represented by the Shanghai Gold Exchange (SGE) Au9999 – had surged by 28% as of November end, making it the best-performing asset in China this year – and its international peer in USD also saw a similar rise.

"In addition to gold’s global drivers, domestic factors such as a depreciating RMB, strong investment momentum – including sizable gold ETF inflows and active futures trading – as well as economic uncertainties all contributed positively to the stunning performance of the Chinese gold price," says Ray Jia, Research Head for China at the World Gold Council.

The World Gold Council sees both retail and investor demand from China stabilising in 2025.

Analysts point out that the rise in gold prices has, of late, dented demand in China, with the People's Bank of China failing to add to reserves in the latter part of the year.

However, the recent pullback in the gold price to $2611/ounce could start drawing buyers back into the market.

"We remain long gold in our global portfolio and believe holding around 5% within a USD balanced portfolio is optimal from a
diversification standpoint, particularly with Trump’s inauguration approaching and money market pricing a more hawkish Fed than we
expect," says Gordon at UBS.