Renowned financial blog Zero Hedge reported that according to renowned investment bank Goldman Sachs, China has secretly purchased a large amount of gold, which is 10 times more than the official report.

(Screenshot source: Zero Hedge)

About a month ago, Goldman Sachs analyst Lina Thomas predicted that gold prices could reach $3000 per ounce by the end of 2025. She came to this conclusion based on a key observation: global central banks, especially the People's Bank of China, have been steadily purchasing gold. However, her prediction has raised doubts, and a common counterargument is that if the US dollar continues to strengthen, gold is unlikely to continue rising. After all, the so-called 'Trump deal' and other global market statements indicate that a strong dollar often suppresses the rise of gold prices.

But Thomas refuted these doubts. In a recent report provided by Zero Hedge, she outlined why she believes gold prices will still rise even if the US dollar remains strong. She emphasized four key points:

1. The Fed's interest rate cut is key, not the US dollar

Goldman Sachs economists predict that even if the global monetary environment is loose and the US dollar remains relatively strong, the Federal Reserve will still cut interest rates. Thomas believes that it is not just the US dollar that is driving demand among gold investors, but the policy shift of the Federal Reserve. If the Federal Reserve cuts interest rates by 100 basis points as expected by Goldman Sachs, this alone could push gold prices up by around 7%. Even if the Federal Reserve becomes less dovish and only cuts interest rates once again, gold prices may still approach $2890 per ounce.

2. Structural gold purchases by central banks of various countries

Thomas believes that the view that a stronger US dollar will prevent central banks from purchasing gold is inconsistent with the data. In fact, emerging market central banks often exchange their US dollar reserves for gold, especially when their currencies weaken, as this helps to enhance confidence in their own financial systems. Regardless of the strength of the US dollar, this dynamic supports stable demand for gold.

3. Gold and the US dollar as uncertainty hedging tools

When global uncertainty is high (such as trade wars, political instability, or escalating tariffs), both the US dollar and gold have historically risen together. They can serve as a dual hedge in a stormy world, which helps explain why one may not necessarily exclude the other.

4. Neutral impact of RMB weakness on retail demand in China

Even if China's currency faces pressure and broader financial easing measures are in place, Thomas expects retail gold demand in China to remain stable. China's lower interest rates can promote gold purchases, offsetting the inhibitory effect of more expensive gold prices denominated in RMB.

Based on these views, Thomas believes that the biggest risk facing Goldman Sachs' optimistic outlook for gold is not the US dollar at all. On the contrary, the main threat will be that the Federal Reserve will not cut interest rates as significantly as expected. Ironically, less interest rate cuts by the Federal Reserve may mean a hotter economy, ultimately leading to more inflation and higher gold prices. However, the current focus is on central banks of various countries, and China's role in this regard is enormous.

China purchases more gold than acknowledged

Recent data has confirmed a key part of Thomas' theory. Goldman Sachs' research on central banks and institutions purchasing gold in the over-the-counter (OTC) market in London shows that the purchase volume in October was as high as 64 tons. This is much higher than the average level of around 17 tons before 2022. The most surprising thing is that China seems to be the largest buyer, accounting for 55 tons of it.

Why is this worth noting? Because the official report from Beijing stated that they only added 5 tons that month. This is one tenth of Goldman Sachs' analysis result. Two years ago, Russia's foreign exchange reserves were frozen, which seemed to be a warning to the central banks of emerging economies. It emphasizes the importance of holding reserves that foreign governments cannot access.

Why buy gold in large quantities?

For a long time, emerging market central banks have regarded gold as a form of security. After the 2008 financial crisis, Chinese leaders expressed concerns about its large-scale investments in the United States and questioned the long-term safety of its dollar denominated assets. Over time, these concerns, coupled with increasing sanctions risks and geopolitical tensions, have prompted China and other countries to diversify their reserves and accumulate gold. Unlike currency or bonds, gold cannot be easily "frozen" by foreign entities, making it an insurance policy against future financial black swans.

After the conflict in Ukraine, the United States and its allies froze the assets of the Russian central bank, sending a strong signal: if you are a central bank governor of an emerging market, especially a country that is wary of Western influence, then gold feels safer than ever before. The purchase volume of gold has surged, and there seems to be no sign of slowing down this trend.

What else supports this viewpoint?

Will this gold buying frenzy continue? This is possible. Even if geopolitical tensions ease, the precedent of freezing reserves has already been set. Compared to major developed economies such as the United States, France, Germany, and Italy, emerging market central banks, including the People's Bank of China, hold a much smaller proportion of gold in their foreign exchange reserves. The reserves of major developed economies such as the United States, France, Germany, and Italy are mostly gold. This gap indicates that there is still a lot of room for buying.

According to a survey conducted by the World Gold Council in 2024, 81% of central banks expect the total global gold reserves to increase next year. No central bank expects a decrease. Nearly one-third of the surveyed central banks plan to increase their gold reserves, the highest proportion since the survey began in 2018.

What does this mean for gold prices?

For Goldman Sachs' prediction that gold prices will reach $3000 per ounce by the end of 2025, these secret large-scale purchases by central banks, especially China, provide important support for gold prices. If their "real-time forecast" of central bank purchases exceeds expectations by about 10 tons per month, this could push the forecast up by about $50 per ounce, bringing gold prices closer to $3050 per ounce. On the other hand, if the Federal Reserve does not cut interest rates as expected, the gold price forecast may decrease by around $100 compared to the baseline scenario.

Anyway, the calm but sustained demand for gold from central banks around the world (led by China's cautious hoarding) reinforces the view that the long-term trend of gold will continue to rise significantly, especially as central banks hedge against an increasingly uncertain world.