HSBC's Comprehensive Analysis of Gold Logic: Upward Momentum May Be Approaching Its Limits

After reaching a historic high of $3,500 per ounce on April 22, 2025, gold prices have seen a significant correction. Although geopolitical factors and central bank gold purchases will continue to support gold, prices may be nearing a phase peak.

According to the Chase Wind Trading Desk, HSBC stated in its latest report, that while geopolitical risks, central bank gold demand, and a weakening dollar will continue to support gold prices at historical highs, factors such as weakening physical demand, increased supply, and reduced expectations for Federal Reserve interest rate cuts are expected to put some pressure on gold prices in the second half of 2025.

It is noteworthy that after Israel and the United States launched strikes against Iran, gold prices failed to break through the April high of $3,500 per ounce, indicating that the market may have fully priced in geopolitical risks. Additionally, the pace of Federal Reserve interest rate cuts may be slower than expected, which will limit the upside potential for gold prices.

HSBC has raised its average gold price forecast for 2025 to $3,215 per ounce (previously $3,015), for 2026 to $3,125 per ounce (previously $2,915), and for 2027 to $2,925 per ounce (previously $2,750), while maintaining its long-term forecast at $2,350 per ounce. The expected trading range for gold prices in 2025 is $3,100 to $3,600 per ounce, with an end-of-year price of $3,175 per ounce for 2025 and $3,025 per ounce for 2026.

As of the time of writing, spot gold is hovering around $3,350 per ounce.

Geopolitical and Trade Tensions Continue to Support Gold Prices

HSBC acknowledges that gold has traditionally been a safe-haven asset during economic and geopolitical uncertainties. Academic research has proven a positive correlation between geopolitical risks and gold prices. Since the 9/11 attacks, especially in the past five years, gold prices have almost continuously risen, reflecting market concerns about long-term, unresolved uncertainties.

However, HSBC believes that the market's reaction to geopolitical risks may have reached a "saturation" point. After the Iran crisis, gold prices failed to break through the April high, indicating that the market may need more destructive events to push gold prices to new highs. Additionally, former U.S. President Donald Trump has stated that he does not wish to see a regime change in Iran and insists that both sides should maintain a ceasefire, which has somewhat alleviated the pressure of geopolitical risks.

In terms of trade, the slowdown in global trade growth is generally favorable for gold. Under the shadow of Trump's tariffs, HSBC's economic team expects global trade growth to be only 1.8% in 2025 and 0.6% in 2026. This sluggish trade flow is sufficient to continue supporting gold prices.

Monetary Policy, Debt, and Dollar Impact

The delay in expectations for Federal Reserve interest rate cuts may have a more negative impact on gold than it appears on the surface. HSBC's U.S. economist Ryan Wang expects the Federal Reserve to cut rates by 25 basis points in September and December 2025, and March 2026, which is far below market expectations from a few months ago and could become a negative factor for gold prices.

However, the rising government debt may support gold prices. The IMF points out that global public debt could rise to 100% of GDP by 2030, raising concerns about long-term fiscal sustainability. Harvard University economics professor Ken Rogoff noted in a June 6 FT column that U.S. fiscal policy has "run out of control," with both parties lacking the political will to address this issue before a major crisis occurs. This situation typically increases demand for gold.

Regarding the dollar, HSBC's foreign exchange research team expects the dollar to weaken in the second half of 2025, which should support gold prices, but may not be enough to drive gold prices significantly higher. The team expects the euro to reach 1.20 against the dollar by the end of 2025 (previously 1.15) and the pound to reach 1.37 against the dollar (previously 1.32). However, the team expects the dollar's weakness will not extend into 2026, which may put pressure on gold prices next year.

Strong Investment Demand but Facing Limits

Investor demand remains strong, with gold ETFs shifting from net selling to net buying.

HSBC's research report indicates that ETF demand has increased by nearly 7.94 million ounces this year, reaching 90.79 million ounces as of the report's writing, equivalent to an increase of 247 tons. HSBC expects ETF investor demand to remain positive but to cool from the levels seen in the first half of 2025, with an expected increase of 300 tons in 2025 (previously 245 tons) and a decrease to 150 tons in 2026.

Net long positions on CME reflect a bullish market, but there are also limitations. Although net longs are still at a high level of 23.06 million ounces, this is about 4 million ounces lower than HSBC's previous report, indicating a slowdown in the pace of increase. Total long positions remain high at 31.11 million ounces, while total short positions are low at 8.05 million ounces. If net long positions decline further, gold may weaken.

Shrinking Physical Demand May Weigh on Gold Prices

Jewelry demand accounts for about half of global gold consumption and is the dominant factor in the physical gold market. However, record-high prices have caused significant damage to gold demand in 2024, with all evidence indicating that demand will further decrease this year.

HSBC cited data from the World Gold Council indicating that jewelry demand in the first quarter of 2025 is expected to decline by 21% year-on-year to 380.3 tons, nearly a 100-ton decrease from 480.1 tons in the first quarter of 2024.

In terms of gold bars and coins, demand for gold coins is expected to drop by 31% to 201 tons in 2024, the lowest level since 2017. Demand in the first quarter of 2025 is projected to decline by 32% year-on-year to 45.2 tons. The U.S. Mint sold only 7,500 ounces of gold coins in May, a 72% decrease from 26,500 ounces in the same period of 2024.

In contrast, gold bar demand is performing better, expected to grow by about 10% to 861.8 tons in 2024, with a year-on-year increase of 14% to 257.4 tons in the first quarter of 2025.

Central Bank Gold Purchases Remain Strong but May Slow

Central bank demand has been one of the most solid supports for the gold market in recent years.

HSBC's report noted that central bank gold purchases surged to 1,081 tons in 2022, reaching 1,051 tons in 2023, and slightly increasing to 1,086 tons in 2024.

Meanwhile, according to data from the World Gold Council and IFS, total official sector demand in the first quarter of 2025 amounted to 243.7 tons. The main reasons for central banks buying gold include diversification away from the U.S. dollar, concerns about geopolitical risks, and portfolio diversification.

Although central banks are less sensitive to prices than speculative traders, HSBC observed that some central banks are reluctant to make large purchases above $3,000 per ounce. Therefore, HSBC expects central banks to purchase 955 tons of gold this year (up from a previous estimate of 925 tons) and 900 tons in 2026 (up from a previous estimate of 850 tons). While these levels are lower than in recent years, they remain historically high.

Continuous Supply Growth May Pressure Gold Prices

Global gold production is expected to grow by 1% to 3,673 tons in 2024, setting a new historical high. High prices are encouraging countries like Mexico, Canada, Peru, and Guinea to increase production, mainly from the expansion of existing facilities. However, this is partially offset by declines in production from the United States, Australia, Bolivia, and the Democratic Republic of the Congo, primarily due to declining grades or the closure of aging facilities.

According to data from the World Gold Council, global mined gold production reached 855.7 tons in the first quarter of 2025, slightly increasing by about 2 tons year-on-year, but down 11% from 957 tons in the fourth quarter of 2024 The decline in output is not a structural decrease, but rather reflects seasonal fluctuations due to the slowdown in production during the winter months in the Northern Hemisphere.

In terms of scrap gold, recycled gold supply is expected to grow by 11% to 1,369 tons in 2024. However, in the first quarter of 2025, recycled gold is projected to drop to 345 tons, a year-on-year decrease of 1%. This decline is surprising and may be due to some holders being reluctant to part with their materials for fear of missing out on future price increases amid soaring prices. HSBC predicts that scrap gold supply will reach 1,400 tons for the first time in 2025, and 1,390 tons in 2026