"Gold Prices Have Room to Rise Another 10% by Year-End"

ETFs Emerge as Key Buyers After Central Banks
Fiscal Concerns and Inflation Fears Fuel Buying Sentiment
Prices Could Continue Rising if Uncertainty Persists

After remaining in a price range following a rally from February to April this year, gold prices began to surge sharply again at the end of August. This trend differs from previous increases, which were driven by expectations of interest rate cuts and a weakening dollar. On September 9, Shinhan Investment Corp. released a report titled "Gold: How High Can It Go?" analyzing that recent gold price increases, fueled by ETF demand, could leave room for an additional 10% rise by the end of the year.

BRICS Central Banks and Global ETFs Leading the Buying

Theoretically, gold prices move inversely to interest rates and the value of the dollar. Recently, expectations for a U.S. interest rate cut have risen again. However, this is at a level similar to May and June, when U.S.-imposed tariffs led to hopes for rate cuts. At that time, gold prices remained in a range. Moreover, since August, the dollar's weakness has stalled, making it difficult to attribute the rise in gold prices to a weaker dollar.

Therefore, the recent rise in gold prices can be seen as the result of ETF purchases being added to central bank buying worldwide. Since the Russia-Ukraine war, central banks have increased their gold purchases. The top ten countries that have expanded their gold reserves are China, Poland, India, Turkey, Japan, Thailand, Hungary, Qatar, Russia, and Brazil. Except for Japan, all are emerging markets such as the BRICS countries and nations with ongoing geopolitical instability.

This year, gold purchases through ETFs have surged. As investors typically buy gold ETFs to hedge portfolio risks, the growing uncertainty in the global economy has driven increased ETF-based gold buying. Since the beginning of the year, downward pressure on the U.S. economy has intensified, while tariff-induced inflation risks have also risen. Political instability and concerns over fiscal soundness in countries such as Japan and France have also emerged.

Gold Could Reach $4,000 per Ounce by Year-End

In reality, gold prices have long diverged from their theoretical values. Shinhan Investment Corp. estimated the gap between a model price-based on the dollar index and real interest rates, which closely tracked gold prices before the COVID-19 pandemic-and the actual price. Until 2022, the gap between the model and actual prices was limited to within 10%. However, since 2022, this divergence has steadily widened.

Ha Geonhyeong, an economist at Shinhan Investment Corp., stated, "Given the limited supply of gold, central banks' expansion of gold reserves has reduced the amount of gold circulating in the market. As central banks increase their gold holdings and ETF-based risk-hedging demand grows, the divergence between the model and actual prices is inevitable." If the pace of central bank gold accumulation remains steady after 2022, the gap between the model and actual prices is expected to widen further from the current 200% to 230% by year-end.

Recently, gold prices have approached $3,700 per ounce. Shinhan Investment Corp. analyzed that if current economic and financial conditions persist, prices could rise to $4,000 by the end of the year. Economist Ha explained, "Unless the factors currently driving gold prices-such as concerns about a U.S. economic slowdown due to weakening employment, upward inflation risks from tariffs, and fiscal risks-disappear, the upward trend in gold prices is expected to continue. However, unlike in the past, as ETF supply and demand now have more influence than central bank purchases, it is highly likely that short-term overheating and corrections in gold prices will occur together."