Gold prices could surge to $3,000 as flows 'have plenty of scope to expand': Citi

Gold prices might surge to $3,000 per ounce as financial flows show potential for significant expansion, according to a recent report from Citi analysts.

The bank says that the weakening US labor market, coupled with a broader trend of disinflation and a notably soft June CPI print, strengthens the argument for a dovish pivot by the Federal Reserve at the upcoming July FOMC meeting.

"This should be bullish for gold and silver into year-end," Citi stated, with positive effects also expected for base metals like copper.

Citi's analysis highlights the impact of previous Fed cuts on precious metal prices, noting that "median log returns for precious metals, annualized, were 13% in the 6-month period following the first Fed cut" across the past four cycles.

They further emphasized that "12-month returns for the sector averaged 20%+ during the two most recent episodes," aligning with their gold price targets of $2,800 to $3,000 per ounce and silver price targets of $38 to $40 per ounce by mid to late 2025.

The research note also underscores the recent inflows into bullion ETFs, which have posted net inflows in June for the first time in the trailing 12 months, with July continuing this trend at a +30t monthly pace.

"This may foreshadow a critical reversal of a 43-month net de-stocking trend totaling some ~925t," Citi noted, suggesting a significant bullish turn for gold.

Moreover, Citi sees room for further expansion in Comex gold MM net length, which has remained steady around 160-190k lots from mid-March to early July. They anticipate that net length could increase by another 100k lots, drawing parallels to the 2016 and 2019 trends.

Citi concluded that the super-contango in the curve has likely suppressed the build in longs for the first half of 2024, but a higher price and higher volatility environment towards the end of the year would encourage fresh length to be added.

"With a margin ratio of 20-1 and plenty of dry powder on the sidelines," the potential for growth in gold prices remains strong, states the bank.