This year has seen an astonishing rise in gold prices, surging by 30% and constantly breaking historical recordsAs these prices soar, speculations abound regarding who the major buyers of gold will be in the coming year, especially at such elevated levels.

On December 13, analysts from JPMorgan released a new report maintaining an optimistic outlook on the gold market, forecasting prices could potentially hit $3,000 per ounce by 2025. The analysts highlighted the critical refuge gold provides amid escalating macroeconomic uncertainties, suggesting that its role as a hedge will remain significant.

The report suggested that there are primarily two scenarios that could drive the rising demand for goldThe first scenario involves macroeconomic turmoil which prompts central banks and investors to increase their gold holdingsThe second scenario presents a more stable economic environment where the Federal Reserve initiates a rate-cutting cycle, thus spurring inflows into gold exchange-traded funds (ETFs). Over the long term, the trend of central banks diversifying away from dollar-denominated assets will lend further support to the gold market.

Digging deeper into these scenarios, the analysts propose distinct futures that hinge largely on the macroeconomic landscape.

The first scenario, characterized by turmoil, could manifest as rising tariffs, escalated trade tensions, spikes in inflation, or a notable expansion of the U.S

budget deficitUnder such conditions, increased purchases from central banks, particularly from the People's Bank of China, could emerge as a significant source of gold demandNotably, the PBoC recently announced its return to gold purchasing in November, marking its first increase since April of this year.

Moreover, individual investors in China, faced with fluctuating currency rates, may perceive gold as a method for wealth preservationLong-term investors might also consider boosting their allocations in gold amidst concerns surrounding inflation and the depreciation of debt.

In contrast, the second scenario presupposes a more stable macroeconomic climateShould this occur, market attention would likely shift to a Federal Reserve rate-cutting cycleIn this context, on one hand, gold ETFs could attract more investments as the appeal diminishes for money market funds, while on the other hand, central bank purchases would not likely reach the extreme levels observed in a tumultuous environment

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However, the analysts believe that the structural shift of central banks diversifying their dollar reserves would persist.

Despite the tone of uncertainty, the need for gold by central banks remains robustThe third quarter of 2024 saw a decline in gold purchases, estimated at approximately 186 tons, and yet the total purchases for the first three quarters of 2024 reached approximately 694 tons, reflecting a year-over-year drop of 17% but still aligning with 2022 levelsMore encouragingly, as the year draws to a close, signs of rejuvenation in central bank gold purchasing activity are emerging.

According to the latest data from the International Monetary Fund (IMF), global central banks' net purchases in October amounted to 60 tons, the highest monthly figure recorded in a yearIndia, in particular, demonstrated notable activity by enhancing its gold reserves by 27 tons in October, bringing its total purchases for the year to 77 tons.

After a general rebound in gold purchasing among central banks in October, China returned to the market, with the PBoC augmenting its gold reserves by approximately 5 tons in November, its first increase since halting purchases in April 2024. Though this figure is relatively modest compared to its average monthly purchases of nearly 18 tons during the period from November 2022 to April 2024, it signifies a revival in China’s gold accumulation amidst declining holdings of U.S

Treasury bonds.

Currently, about 23% of China's foreign exchange reserves are held in U.STreasury bonds, a significant drop from 45% in 2010. It seems plausible that China might further elevate its gold reserves while diminishing its stake in U.Sdebt.

Recent years have exhibited significant structural shifts in the global proportion of gold within foreign exchange reservesThe IMF reports that by the end of the third quarter of 2024, gold comprised approximately 18% of global official reserves, a rise from around 15% at the end of 2023. This increase is attributed not only to heightened gold purchases but also to a rise in gold valuations stemming from a 30% price escalation since the beginning of the year.

When considering global gold holdings, the U.S., Germany, France, and Italy together possess approximately 164,000 tons of gold, which constitutes nearly half of the world’s official gold reserves

The United States alone holds about one-quarter of the global inventory, with these four countries’ gold stockpiles far exceeding those of other nations, thus skewing the global averagesExcluding these four, the global proportion of gold reserves drops to about 11%.

In the realm of countries with substantial foreign exchange reserves, China's gold holding percentage is relatively low, positioning it as a prospective gold purchasing powerhouse in the futureAs of the end of the third quarter of 2024, of the 30 countries with over $100 billion in foreign exchange reserves, 18 had gold holding percentages under 11%. If China raises its gold reserve proportion by just 1%, it would translate to an approximate increase of 400 tons in gold purchases.

In addition to China, notable gold purchasing activities in countries like India, Japan, Saudi Arabia, and Singapore reflect a broader trend of diversifying away from the dollar.

On the other hand, demand from Chinese retail investors has shown signs of recovery

Recent data indicates a net import demand for unrefined gold rebounded in the last two months following a dip experienced in AugustAlthough October's import volumes were nearly 80 tons—down 11% year-on-year—it still reflects a 15% decline year-to-dateChinese retail demand for gold is influenced by multifaceted factors, including price fluctuations, GDP growth, interest rates, currency exchange rates, the real estate market, stock markets, and demographics.

World Gold Council data indicates that by the end of the third quarter of 2024, jewelry demand in China had decreased by 22% year-on-year, while demand for investment bars and gold coins saw a commendable rise of 28%, offsetting some of the pressure on overall demandThis phenomenon illustrates that despite a sluggish jewelry market, interest in gold as an investment vehicle remains robust.

JPMorgan notes that in terms of monetary policy, China recently announced a shift towards a gentle easing approach—its first move of this nature since 2008. With interest rate cuts, the PBoC once again acquiring gold, and fluctuations in the renminbi exchange rate, JPMorgan projects that Chinese consumer appetite for gold will remain strong.

However, the central risk arises from the possibility that these stimulus measures may spark a vigorous recovery in the property and stock markets, diverting potential investments away from gold

Yet, the exchange rate of the renminbi remains a pivotal factor since gold can act as a hedge against declining purchasing power.

Historically, significant fluctuations in the renminbi have been correlated with surging gold import demand in China, as seen during pivotal years such as 2015/16, the trade war period in 2018, and 2022—the latter prompting the recent surge of gold purchases by China and its central bank.

Looking ahead, gold ETFs are anticipated to continue showing promising growth potentialPresently, global holdings in gold ETFs are approximately 3,200 tons (roughly 103 million ounces). Although this figure is about 18% lower than previous highs, the potential for growth remains significantAccording to the World Gold Council, as of December 6, the value of gold ETF holdings, in nominal terms, was around 11% lower than in 2020.

Considering that over $6 trillion in the global money market funds yield low returns, should the macroeconomic environment trend towards moderation by 2025, investors may begin to refocus on the Fed’s rate-cutting cycle, potentially leading to substantial growth in gold ETFs.

The historical data shows that variations in gold ETF holdings are largely driven by changes in interest rates

When rates decline, non-yielding gold is attractive as a risk-free asset compared to bonds and money market funds, and vice versaTherefore, if the Fed initiates a rate-cutting cycle in 2025, this could fuel an upsurge in demand for gold ETFs.

Moreover, investor demand for physical gold is likely to remain strongDespite this year’s increase in gold prices, the World Gold Council indicates that demand for gold bars and coins, for the first nine months of 2024, has only fallen by about 2% year-on-year, highlighting persistent investor interest in physical goldShould significant macroeconomic shifts occur in 2025, particularly in the form of declining interest rates or escalated economic uncertainties, demand for physical gold could witness an uptick.

As of now, total gold held by investors is nearing 49,300 tons, valued at roughly $4.2 trillionThe net non-commercial positions in COMEX gold represent approximately 980 tons, with global ETF holdings approximating 3,200 tons, while private investors maintain more than 45,000 tons in the form of bars and coins.

At present, gold accounts for about 2% of global stocks, liquid fixed income (excluding foreign exchange reserves), and alternative asset investments