World Bank forecasts gold Prices to reduce to $1,500 in 2025 before increasing to $1,600 in 2035. But in the medium term, the Bank forecasts gold prices to be at $1,880 in 2022, $1,700 in 2023, and $1,650 in 2024. Historically Gold Prices have proved extremely difficult to predict as actual Prices have varied significantly from previous forecasts. This article explores what an investor should learn from the Gold price forecasts and how to adjust the portfolio accordingly. The report also explains what can cause an increase or decrease in gold prices in the future.
In the World Bank Commodities Price Forecast, April 2022, the Bank maintained the forecast of Gold Prices to be at $1,500 in 2025 and $1,600 in 2035. These forecasted gold prices are lower than the current Gold price of $1,800 per Troy Ounce. The Below table summarizes Gold Price Forecast by World Bank from 2021 to 2035.
Gold prices are forecasted to be at $1,880 in 2022 and reduce to $1,700 in 2023 and $1,650 in 2024.
Gold Price Forecasts (April 2021, World Bank)- USD per Troy Ounce
| Year | 2021 forecast |
| 2021 | 1,800 |
| 2022 | 1,880 |
| 2023 | 1,700 |
| 2024 | 1,650 |
| 2025 | 1,500 |
| 2030 | 1,549 |
| 2035 | 1,600 |
Investors in gold may not use these price forecasts as an indication to sell gold from their portfolios. Instead, evaluate their circ*mstances before making any investment decision. Continue reading to understand the Gold Price Forecasts and insights for Gold Investments.
Table of Contents
- Is it challenging to predict gold prices?
- How reliable is the gold price forecast?
- Why is it challenging to forecast gold prices?
- Is gold a good investment?
- Is it the right time to buy gold?
- Are gold prices expected to increase?
- Are gold prices expected to decrease?
- How much gold do I need in my portfolio?
Let’s dive into the details-
Is it challenging to predict gold prices?
Predicting gold prices in advance is tricky, and most investment banks and agencies do not publish the price forecasts regularly. Unlike stocks and bonds, the value of gold is not derived from the value of any underlying asset. The price of gold is dependent on what buyers are collectively willing to pay for owning it. As an investor in gold does not receive any cash flow in the holding period, it becomes impossible to value gold using conventional valuation methods.
Pricing of tradable commodities and metals is possible by analyzing the demand and supply of the items. But for gold, predicting the demand and supply becomes difficult due to the multiple factors affecting gold demand and supply.
World bank included gold with silver and platinum in its quarterly Commodities Prices Forecast of precious metals. World bank base its Gold Price forecast on inflation expectations, currency movements, and interest rate expectations.
How reliable is the gold price forecast?
Historically long-term gold price forecasts are less reliable as we observe a lot of variation between forecasts on various periods and actual gold prices. In the world Bank’s 2018 commodities prices forecast, the price of gold for 2021 was forecasted to be at $1,247, while the actual gold price in 2021 was much higher in the range of 1,676 to 1,950.
In its current prediction, World Bank raised the price forecast for 2025 to 1500 from its previous forecast of 1,179 in 2018. Similarly, the prices for 2030 increased to $1,549 from the last projection of 1,100 in 2018.
The below graph explains the variation in forecasted gold prices between forecast dates. In 2010, World Bank predicted gold prices to be at 900 in 2020, while three years later world bank revised the price forecast to 1,369.
Actual Gold prices have significantly deviated from the price forecasted by the world bank, raising concerns about the reliability of the world bank’s long-term gold price forecast. The below table represents the variation in actual prices from the latest forecast.
Actual Prices have varied significantly from the forecasted price
| 2010 Forecast | 2013 Forecast | 2018 Forecast | Actual Prices | % change with forecast | %change from long term forecast | |
| 2010 | 1,000 | 1,421 | 42% | |||
| 2011 | 975 | 1,564 | 60% | |||
| 2012 | 950 | 1,657 | 74% | |||
| 2013 | 1,600 | 1,237 | -23% | |||
| 2014 | 1,550 | 1,189 | -23% | |||
| 2015 | 850 | 1,500 | 1,061 | -29% | 25% | |
| 2016 | 1,479 | 1,152 | -22% | |||
| 2017 | 1,458 | 1,320 | -9% | |||
| 2018 | 1,437 | 1,300 | 1,285 | -11% | ||
| 2019 | 1,417 | 1,282 | 1,552 | 21% | ||
| 2020 | 900 | 1,396 | 1,264 | 1,898 | 50% | 111% |
| 2021 | 1,247 | 1,796 | 44% |
The above table shows that long-term gold price forecasts are less reliable. In contrast, estimates for shorter periods are reasonably reliable.
Why is it challenging to forecast gold prices?
Gold is an independent asset, and the price of gold is not derived from any other commodity or asset. Gold can be considered like a currency, and its value is inversely related to fiat currencies such as the Dollar, Euro, or pound. While the relationship is inverse, the degree of change in the price of gold to the devaluation of currencies is nonlinear.
The supply of gold can be predicted based on the volume of gold discoveries, amount of capital investments by gold mining companies, and changes in all-in cost for miners to produce an ounce of gold. But demand for gold is difficult to predict as the demand drivers from jewelry and investments are difficult to estimate in advance.
Jewelry demand increases at the time of economic growth and expansionary economic conditions. At the same time, Investment demand rises at times of increased uncertainty and increase in inflation expectations. This makes forecasting gold prices difficult because estimating uncertainty’s timing and scale is impossible.
Is gold a good investment?
Gold has proved to be an excellent long-term investment, and Gold prices have multiplied six times since 2000. If you had purchased 1000 dollars worth of gold in 2000, it would be worth 6,200 dollars today. Gold prices have multiplied 52 times since 1970.
Like any other tradable asset, gold prices also fluctuate. In certain periods, Gold investment has produced a negative return for the investors. Notably, gold performed poorly between 1980 and 2000.
Is it the right time to buy gold?
It is always a good time to buy gold if you want to preserve your wealth. As Gold price is approaching its all-time high of around $2,000, it is prudent for short-term buyers to consider technical levels before making a purchase decision. As for timing, the market is impossible, and prices may drop after you buy gold.
At around $2000, gold may be viewed as expensive at the current levels. But when you compare it with other assets, gold is undervalued, and prices are expected to rise. The below chart compares the valuation level between stocks and gold. It identifies gold to be undervalued in comparison with stocks.
Stock prices are related to the earnings of companies in the index. The valuation differences across the period in stock prices are compared by Price to Earnings Ratio (PE Ratio). A multiple of Gold Price to PE ratio of S&P 500 can be used to evaluate the valuation attractiveness of gold.
Currently, gold is at 50 times the PE Ratio of S&P 500, the lowest level since 2010.
There are two possible reasons for a low Gold to PE multiple. First, current gold prices are low compared to stocks, and second, overvalued stock prices. Either of these reasons points to an increase in gold prices. An overvalued stock index may lead to a correction in stock prices and an increase in inflow to gold investments. Gold prices have increased significantly after the collapse of equity prices in the past.
Are gold prices expected to increase?
We expect gold prices to increase in the future, though World Bank forecasted gold prices to decrease to 1500 in 2025 and 1600 in 2030. We believe macro-economic conditions such as low-interest rates, low expected return on stocks, increased market volatility, and expected increase in inflation all point towards an expected rise in gold prices.
With gold’s status as an international fungible asset and its socio-cultural relevance, gold is expected to continue to shine further. The following are the reasons in support of an increase in gold prices.
- Low Interest Rates
- Low Equity Risk Premium and Expected return on stocks
- Increased market volatility
- Increased inflation expectations
- Higher Oil Prices
- Increased demand from institutional investors
- Economic growth in China and India to increase jewelry demand from China & India
- Devaluation of currencies of emerging economies
- Supply restrictions of Gold due to ESG concerns
- Geopolitical uncertainty and gold prices
We will delve in to details of why gold price is expected to increase.
1. Low Interest Rates
Interest rates are at historic low levels, with 10-year US treasury bonds yielding a low 1.5%. Low-interest rate environment is good for gold prices due to the lower opportunity cost of holding gold. Opportunity cost can be explained as the return an investor receives by investing in another asset. Instead of buying gold, an investor can invest in bonds that pay annual coupons.
Since Bond prices are higher in a low-interest environment, bond investment becomes less attractive. Buying and holding a 10-year treasury bond till maturity gives only a 1.5% return per year. As the return on bonds remains low, it provides an additional attraction for investors to buy gold.
2. Low Equity Risk Premium and Expected return on stocks
When stock valuations are high, the potential for return on investing in stocks reduces. The return a stock investor reasonably expects from investing in the stock market is the expected rate of stock return. The expected return from stocks tends to be lower when stocks are valued higher, and stock prices increase faster than improvement in earnings.
The expected return consists of two factors Equity Risk Premium and Risk-Free Rate. Equity Risk Premium refers to an investor’s excess return by investing in stocks above the risk-free rate. Risk Free Rate refers to the rate of return on risk-free investment, typically yield on 10-year US Government Bonds.
Prof. Aswath Damodaran of New York Stern University estimates current ERP to be the lowest in recent history at 3.7%. Since the future return expectation on stocks is low, incentives to invest in gold are high.
3. Increased market volatility
Gold as an investment performs well during economic uncertainty. This feature of gold became clearer when gold prices increased after 2008 financial crisis and at the time of the pandemic in 2020. The below chart compares gold prices with S&P 500 volatility index. We can see gold prices increase with higher volatility. The markets remain volatile, which will help gold prices rise in the future.
4. Increased inflation expectations
Conventional wisdom says that an increase in inflation expectations leads to a rise in gold prices. The rationale for such an assessment is that higher inflation devalues currencies, and low currency values are good for gold prices.
Us federal reserve expects inflation to increase to 2.1% in 2022 and 2.2% in 2023. With an improved employment outlook, some analysts expect inflation to grow further.
| PCE inflation in the US | 2016 | 2017 | 2018 | 2019 | 2020 | 2020 F | 2021 F | 2022 F | Long Term |
| Rate of inflation | 1.6% | 1.8% | 2.0% | 1.5% | 1.2% | 3.4% | 2.1% | 4.3% | 2.0% |
5. Higher Oil Prices
Oil and gold tend to move together; gold prices increase when oil prices are high. One possible reason for such a high correlation is that oil price is an important inflation component. A spike in oil prices will increase inflation and reduce currency value. Most things which reduce the value of currencies are generally good for gold.
Goldman Sachs forecasts oil prices to increase to $80 in 2022, and as with most times in history, we can expect gold prices to follow the increase in oil prices.
6. Increased demand from institutional investors
Demand from Central banks and institutional investors is expected to increase mid to long term. Central Banks and agencies buy gold to hedge against the unintended effects of additional liquidity provided by low-interest rates and currency printing. Low-interest rates and printing of currencies devalue currencies and may lead to an increase in the price of gold.
Since other investable assets like stocks and bonds are highly-priced, institutions face high price risk in the market. To hedge against market correction and an increase in inflation, institutions increase their allocation to gold, which will likely increase gold prices further.
Amount of physical gold holding by Gold ETFs
7. Economic growth in China and India to increase jewelry demand from China & India
Jewelry demand from customers accounts to more than 50% of demand for gold. Most of the jewelry demand comes from China and India. Economic growth in China and India is forecasted to accelerate in the next few years. This economic expansion in these countries will increase the demand for jewelry and lead to an increase in the price of gold.
8. Devaluation of currencies of emerging economies
Preservation of wealth and purchasing power is an essential reason behind the love for gold jewelry for households in India and other emerging economies. Due to the prolonged devaluation of emerging market currencies, all investments in emerging markets face significant currency risk. Sophisticated Investment Managers usually hedge the currency risk in emerging markets.
These hedging options are either too expensive or difficult to comprehend for households and retail investors. Gold offers a proven solution for families in these regions to retain their purchasing power and participate in investment growth.
Indian Rupee return of gold is significantly higher than the return from the appreciation of gold price. A gold investor in India has two sources of return, price return from the appreciation of gold and currency return from the depreciation of Indian Rupees. This is true for all other emerging economies faced with high inflation and depreciation of their currencies.
Emerging economies tend to keep their currencies low to remain competitive in the export markets. Investors in emerging markets will continue to trust in gold to protect purchasing power. I believe the devaluation of foreign currencies will remain an important source of demand for gold and will keep the prices high.
9. Supply restrictions of gold due to ESG concerns
Environmental, Social, and Governance(ESG)considerations take center stage in development discussions in most countries. ESG issues are taken seriously by mining companies and gaining importance in policy decisions of countries where mines are located. These may impact future mining activities and reduce the supply of gold. A reduced supply due to government restrictions on mining will make gold even more precious and may increase the price of gold.
Another point to consider is that ESG regulations may increase the all-in cost of production of gold for mining companies. An increase in production cost may reduce mining output and reduce the supply of gold. I believe a reduced supply of gold will increase the price of gold above all current forecasts.
10. Geopolitical uncertainty and gold prices
International political tensions are another source of uncertainty, which is good for gold prices. The magnitude of geopolitical issues can vary from trade tensions to all-out wars. The increased level of trade tensions between the United States and China has created a lot of uncertainty among investors worldwide.
These tensions between countries will increase in the future, increasing currency risk and business risk. Gold has been proved to be an excellent tool for hedging geopolitical uncertainty, leading to an increase in gold prices.
Are gold prices expected to decrease?
As forecasted by the world bank, there are some possibilities for gold prices to reduce in the future. The price of any tradable asset can fluctuate based on investor sentiments. As experienced in the past short-term reduction in the price of gold is possible. Gold prices have reduced after reaching strong resistance levels in the past. Gold prices have crossed $2,000, reached $2,073 in July 2020, and declined to $1,675 in March 2021. Similarly, after reaching $1,920 in September 2011, gold prices dropped to $1,046 in November 2015.
Besides the short-term fluctuations in price, gold prices may decline for extended periods. Although such a situation is not likely, a decline in gold prices from current prices is possible. Gold prices may decrease if factors relating to the supply of Gold, Government policies, and consumer behavior change. The following factors may lead to reduced gold prices in the future.
- Unexpected increase in real interest rates.
- Increase in supply of gold with significant new gold discoveries.
- Reduced all in cost of production of gold with technological advancement.
- Continued low inflation levels
- Drastic changes in consumer behavior
- Central Banks acceptance of Bitcoin and crypto currencies
- Unexpected policy action by sovereign governments
- Rise of ESG investing
We will explore these factors which may lead to a long-term decline of gold prices.
1. Unexpected increase in Real Interest Rates.
Generally, interest rates increase when actual inflation exceeds the inflation targeted by central banks. Those increases in interest rates are expected and will not affect gold prices. Since gold prices rise with inflation, an increase in interest rates at the same rate as inflation will not reduce gold prices.
In some periods, central banks increase interest rates above the inflation levels; such increases in rates will reduce gold prices. Central banks raise interest rates when economic growth exceeds the country’s long-term growth target to stop overheating the economy. Suppose interest rates rise above the rate of the inflation opportunity cost of holding a non-yielding asset like gold increases. Correspondingly it will reduce the investment attractiveness of gold.
2. Significant increase in supply of gold with new gold discoveries.
Gold has limited utility than other minerals mined and extracted from the earth. The value of gold is the perceived price a buyer is willing to pay for it. The scarcity of gold is an important factor influencing the price perception of buyers. Suppose the supply of gold increases significantly due to the discovery of new mines. In that case, the price of gold may reduce further to the level the world bank forecasted.
Largest Gold Producing countries are
3. Reduced all in cost of production of gold with technological advancement.
Another factor contributing to the supply of gold is the All-in cost of production of gold. Gold mining is an expensive process. If the cost of production of gold reduces due to technological advancements, the supply of gold will increase. If the cost of mining reduces, more gold mining projects will be feasible to operate, leading to a greater supply of gold. An increase in the supply of gold may lead to a rise in gold prices.
How much does it costs to produce gold
4. Continued low inflation levels.
Gold prices and currency values move in the opposite direction. A persistent level of low inflation will lead to an increase in currency values. Investing in gold becomes less attractive when purchasing power can be maintained by just holding currency. A continued low level of inflation may lead to the reduced price of gold.
5. Drastic changes in consumer behavior
Jewelry demand accounts for the largest source of demand for gold. A potential drastic change in consumer behavior against gold jewelry may reduce the need for gold. It is worth noting that the demand for jewelry reduced in 2020 due to the pandemic. Still, the demand returned in 2021 to 50% of the global market.
Gold Demand in Tons
| Tons of gold demand | 2015 H1 | 2016 H1 | 2017 H1 | 2018 H1 | 2019 H1 | 2020 H1 | 2021 H1 |
| Jewelry demand | 1,149 | 953 | 1,061 | 1,051 | 1,065 | 558 | 873 |
| Total Demand | 2,047 | 2,397 | 2,135 | 2,022 | 2,192 | 2,046 | 1,823 |
6. Central Bankers’ acceptance of Bitcoin and crypto currencies
Major Central Banks do not yet accept Bitcoin and other cryptocurrencies. Since bitcoin is perceived to have some characteristics of gold, some investors are attracted to cryptocurrencies. Central banks’ broad acceptance of cryptocurrencies may reduce some investment demand for gold.
Due to extreme fluctuations in the price of cryptocurrencies, many qualified investors have no or low allocation to Bitcoin and other cryptocurrencies. Central Bank’s acceptance of cryptocurrencies may bring competition to gold as an asset and may lead to low prices.
7. Unexpected policy action by sovereign governments.
The most significant risk for gold prices comes from authorities and governments. A substantial change in the policies related to gold investment by mighty sovereign governments like China and India can significantly impact the value of gold. The governments can further increase regulations and cap the purchase of gold by households and investors. Though there is only a very low probability for such policy changes, these could significantly impact the price of gold.
8. Rise of ESG investing.
The rise of ESG investments and ESG concerns may lead to a decline in the price of gold in the future. Investors and consumers are increasingly becoming conscious of the environmental impacts of gold mining. This may lead to a change in asset managers’ investment mandates and reduce the asset allocation to gold. Similarly, ESG concerns may influence consumers, impacting consumer demand for gold jewelry. These can also reduce the demand and price for gold in the future.
Combining these factors may affect gold prices in the future and may lead to lower gold prices. World Bank’s price forecast for 2030 is possible in these scenarios.
How much gold do I need in my portfolio?
Gold has a vital role in most institutional and individual portfolios. However, we recommend that an individual’s allocation to gold may not exceed 10% of the overall portfolio. For investors from countries with high inflation, a higher allocation to gold is justified.
Allocation to gold for institutional investors are based on the institution’s overall portfolio and the investment mandate of the asset manager. It is good to allocate some portion of the investable wealth to gold.
Conclusion
Gold has proved to be an asset for long-term wealth protection. It is an excellent asset for diversification and is used to hedge against economic and currency risks. Gold is truly global, and most portfolios should include some amount of gold in their portfolios.
Gold price forecasts are always tricky, and the world Bank periodically updates its forecasts every year, considering the prevailing economic conditions.
Largest Gold Producing Countries
Which is the largest Gold ETF and what is the amount of gold invested by Gold ETFs?
Further reading –
How to invest in Gold-https://moneygraphit.com/2021/09/10/8-ways-to-invest-in-gold/
Which is the world’s Largest ETF- https://moneygraphit.com/2022/05/15/physical-gold-investment-of-gold-etfs/
Please leave a comment on your gold price forecasts.
Sources-
https://www.gold.org/goldhub/research/gold-outlook-2021-mid-year
https://www.wsj.com/market-data/stocks/peyields
https://www.multpl.com/s-p-500-pe-ratio/table/by-year
http://pages.stern.nyu.edu/~adamodar/
https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20210616.htm
https://finance.yahoo.com/news/goldman-sachs-raises-oil-price-150000626.html
