Morgan Stanley has introduced a new regression model to analyze the factors influencing gold prices, anticipating a potential rise to $3,100 per ounce in the upcoming months. This development follows an unexpected surge in gold prices, which have been defying traditional trends related to the US dollar and oil prices.
Over the past five years, variables such as ETF holdings, central bank purchases, and futures market positions have gained influence over gold prices. The new model incorporates high-frequency factors like ETF flows, central bank reserves, inflation indices (CPI), the dollar index (DXY), a global risk index, and net futures positions. This has significantly improved the model's fit, with a remarkable increase in predictive accuracy from the previous model.
Despite recent interest rate hikes, gold prices continue to rise, driven by sustained central bank purchases and strong demand for gold bars and coins. Mining costs have also supported price levels. Morgan Stanley’s model suggests that gold prices could climb to $3,100 per ounce, especially if interest rates decline further. The potential price range for gold in 2025 is projected to be between $2,500 and $3,100 per ounce.
In 2023, gold's relationship with US real yields (10-year TIPS) broke its long-standing inverse correlation, prompting the introduction of additional factors in the new model. These include ETF assets, central bank reserves, and futures positions, which have gained more weight in the analysis. The global risk index has shifted from a positive to a negative correlation with gold prices over the past five years.
Recent analyses indicate that ETF net inflows are turning positive, and global holdings are increasing. Meanwhile, central bank gold purchases remain a long-term trend, with robust demand from Asia, particularly China and India. Jewelry demand, however, has decreased due to high prices.
Morgan Stanley concludes that the current gold price, hovering around $2,700 per ounce, could rise to $3,100 per ounce under optimal conditions. This scenario coincides with a decrease in interest rates, aligning with resilient investment demand from central banks and other sources. The model's baseline scenario predicts a gold price of $2,800 per ounce in the first quarter, potentially reaching $3,100 per ounce in a bullish market environment.
Gold mining and recycling activities are expected to ramp up, providing supply relief and stabilizing prices by mid-2025. The long-term price forecast remains steady at $1,900 per ounce, based on a combination of marginal costs, project incentive pricing, and regression analysis.
