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Gold Prices Experience Pullback Amid Improving Economic Conditions
Gold prices have recently experienced a decline, moving away from earlier highs, as improving economic indicators dampen the demand for this traditional safe-haven asset. According to a report by Citi, the investment bank has revised its near-term price target for gold downwards to US$3,300 per ounce from a prior estimate of US$3,500, aligning closely with current market values.
Shifting Market Dynamics
Gold reached an unprecedented closing price of US$3,433 on June 13 amidst escalating geopolitical tensions between Iran and Israel and briefly touched US$3,500 in April. However, a subsequent retreat of approximately 4% has been observed as Middle East tensions have abated and optimism over global economic growth has risen—despite typically supportive factors, such as lowering US interest rates and a weakening dollar.
Citi’s analysts noted, "We may have already seen the highs at US$3,500 per ounce in late April," anticipating that the market’s deficit may soon peak. They predict gold prices will remain relatively stable, ranging between US$3,100 to US$3,500 during the third quarter, with projections suggesting a potential drop to between US$2,500 and US$2,700 by the second half of 2026, indicating a 21-25% fall from current pricing.
Policy Developments and Demand Outlook
Several upcoming policy changes could further decrease gold’s attraction as a hedge against market volatility. Key drivers that could bolster confidence in the US economy, according to Citi, include:
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Economic Stimulus: The expected passage of the "One Big Beautiful Bill Act" (OBBBA) is anticipated to provide a notable boost to the US economy, particularly benefiting manufacturing sectors and middle-income earners while being funded through tariff revenues.
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Trade Agreements: The completion of limited trade deals with China and the UK, along with potential agreements with other major trading partners, may also foster a more positive economic climate.
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Federal Reserve Actions: While the Federal Reserve is poised to commence rate cuts in September, with reductions targeted towards neutral levels by March 2026, these actions might initially provide support for gold. However, over time, they could diminish its attractiveness.
- Energy Market Stability: De-escalation of risks associated with Middle Eastern oil supply chains could lead to a US$10 per barrel decrease in energy prices, enhancing overall economic confidence.
Implications for Investment
Citi’s analysis indicates that the gold market is likely to experience its peak deficit during the third quarter of 2025, followed by a downturn in demand as investment interest wanes from the end of the year. The bank strongly advises gold producers to consider hedging against possible declines in prices in light of significant downward risks over the forthcoming 18 months.
Nonetheless, several factors could challenge this pessimistic outlook, including potential tariff escalations, renewed geopolitical conflicts, or worries surrounding a possible hard landing of the US economy or stagflation, additional scenarios that could drive a resurgence in demand for gold as a safe haven.
Overall, Citi perceives that current global economic conditions and reduced policy uncertainty favour traditional risk assets over gold in the short to medium term, as stability in economic indicators becomes more pronounced.
