This Wall Street giant is "bullish in the short term" on gold prices, but the logic for being bearish next year

Citigroup has reversed its previous stance, believing that the current inflation concerns driven by tariffs, a weakening labor market, and expectations of a weak dollar collectively constitute a "perfect storm" for gold prices to rise in the next three months.

According to the news from the trading desk, on August 3rd, Citigroup's research report pointed out that gold is expected to reach a historic high in the next three months, with the target price raised to $3,500 per ounce, providing a short-term tactical opportunity for investors seeking to hedge against declines in U.S. stocks, a weakening dollar, and cyclical risks in the U.S. economy.

(Citigroup raises target price to $3,500 per ounce, while gold prices have been in a "range-bound" state over the past three months)

However, as the U.S. government may introduce stimulus measures in 2026, the economic fundamentals will improve, and Citigroup expects gold prices to face cyclical correction pressure at that time. Additionally, Citigroup emphasizes that the current forward price of up to $3,900 for gold producers provides a "once-in-fifty-years" opportunity to lock in future profits.

Short-term Bullish: Dual Hedging Demand from U.S. Stocks and Dollar Drives Gold Prices Up

Since the beginning of this year, the accelerated investment demand for gold is closely linked to the decline of U.S. stocks and the dollar.

Citigroup believes that the current rise in gold prices is not primarily due to structural factors (such as a moderate increase in central bank gold purchases), but is related to "cyclical" growth, inflation concerns, and dual hedging demand from U.S. stocks and the dollar.

(Cyclical growth, inflation concerns, and a weakening dollar drive gold prices higher)

Data shows that the decline in stocks affected by tariffs in the U.S. and Europe coincided with a weakening dollar index, while gold ETF holdings increased significantly. The dollar has fallen about 10% since February, while gold prices have risen 25-30% during the same period.

(Sell-off in U.S. stocks and dollars, surge in gold ETF investment demand)

Citigroup has raised its target price for gold in the next three months from $3,300 per ounce to $3,500 per ounce, and adjusted the expected price fluctuation range from $3,100-$3,500 to $3,300-$3,600. Specifically, investors are using gold to hedge against a series of imminent risks:

• U.S. Economic and Inflation Risks: The economic growth outlook for the second half of 2025 and tariff-related inflation concerns will continue to heat up. Higher-than-expected tariffs (agreement tax rate of 15% instead of the expected 10%) will push U.S. inflation higher in the short term.

• Risk of Economic Recession: Weak labor market data in the second quarter of 2025 has intensified fears that the U.S. economy may fall into recession

• Expectations of a Weaker Dollar: Citigroup's foreign exchange team has adopted a bearish outlook on the dollar as its base scenario.

• Concerns Over Institutional Credibility: The market has raised more doubts about the independence of Federal Reserve policies and official data statistics.

• Geopolitical Risks: The report mentions that geopolitical risks related to Russia and Ukraine remain high at present.

Citigroup believes that in the current macro environment, gold is becoming significantly more attractive as an asset to hedge against the dual risks of falling U.S. stocks and the dollar.

Supply and Demand Imbalance: Record Demand Supports Gold Prices

From the perspective of the physical market, the fundamentals of gold are exceptionally strong, providing robust support for high prices. The report estimates that gold demand in the second quarter of 2025 reached (or is close to) historical highs. Specifically, the supply and demand imbalance in the gold market is reflected in the following points:

• Demand Side in Full Swing: Investment demand (mainly driven by over-the-counter trading, ETFs, and gold bars and coins) and jewelry demand (benefiting from robust growth in emerging markets and global GDP/income) are both performing strongly. Total demand has increased by more than one-third since mid-2022.

(Physical gold demand hits record high)

• Supply Side Slow to Respond: Despite a 40% year-on-year increase in gold prices, the supply of gold scrap has reportedly remained flat year-on-year, failing to effectively increase market supply.

• Record Supply and Demand Gap: Strong demand combined with lagging supply has led to a record physical gold gap in the second quarter of 2025, with Citigroup estimating that "the sell-off demand from holders" could reach 500 tons, accounting for about 1% of the stock of gold bars and coins.

("Sell-off demand from holders" could reach 500 tons)

The report provides a clear recommendation for gold producers. The current five-year forward price of gold is about $3,900 per ounce, approximately 20% higher than the spot price, and significantly above the marginal production cost of about $2,000 per ounce.

(The profit margins of high-cost gold miners are at a half-century high, with five-year forward prices nearing $4,000 per ounce, about $2,000 higher than marginal production costs)

This enormous price difference provides producers with a "once-in-fifty-years" gift, presenting an excellent opportunity to lock in high profits for the coming years. The report warns that before the Federal Reserve ultimately cuts interest rates (which will lower the forward curve), utilizing the derivatives market for hedging is currently the most prudent strategic choice for producers. **

The Feast Will Eventually End: Why is Citi Bearish on Gold Prices in 2026?

Despite a bullish short-term outlook, Citigroup holds a cautious stance on 2026, believing that a cyclical correction may still occur.

Citi's logic is based on Trump's strong motivation to stabilize the U.S. economy and his approval ratings, which will be stronger as the U.S. midterm elections approach, ultimately putting Trump at odds with gold bulls:

• Potential "Bullish Options" for the U.S. Economy: The report suggests that the Trump administration has a strong incentive to improve the U.S. economy before the midterm elections, including achieving stronger growth and more moderate inflation. Potential fiscal stimulus measures such as tariff rebates and the "Big Beautiful Plan" could effectively boost the economy, thereby weakening gold's safe-haven appeal.

• Prices Have Already Priced In Too Much Expectation: Gold prices have nearly doubled over the past 2-3 years, absorbing a significant amount of positive sentiment. The share of gold in household net wealth has risen to nearly 3%, a historical high.

(The share of gold in household net wealth has risen to nearly 3%, a historical high)

• The Market May Be Overcrowded: Global gold expenditure as a percentage of GDP has also reached 0.5%, the highest level in nearly half a century.

(Global gold expenditure as a percentage of GDP has reached 0.5%)

• Weak Growth Outside the U.S.: The report anticipates that economic growth outside the U.S. will be weak in the coming months, which will limit the downside potential of the dollar, thereby exerting some pressure on gold prices.

Looking ahead to 2027, considering structural positive factors such as the U.S. deficit and central bank purchases, as well as the diminishing stimulus effect of the "Big Beautiful Plan" in 2027, Citi has raised its 2027 forecast from $2,600 to $2,800 per ounce