Gold’s Second Wind: Why $3,000 Is Closer Than You Think

Investors concerned that gold prices may be overextended have nothing to fear as a new set of drivers are propelling the precious metal into another distinct rally, and this one will blow through $3,000 in short order, according to Dylan Smith, Senior Economist at Rosenberg Research.

In an interview with the Financial Post’s Larysa Harapyn on Wednesday, Smith was asked whether he believes the gold rally can continue after the yellow metal has already risen so far so fast. He replied that gold is actually seeing two separate rallies, each with its own distinct drivers, which means that the next stage of the bull market is only just beginning.

“I think we've seen a very big leg up in gold over the last week since the Fed [delivered] its big 50 basis point rate cut,” Smith said. “That's something we had expected to be coming for some time. But I think an important thing is happening in the gold market in terms of a big change in what's driving the gold price compared to the big rallies that we saw at the beginning of this year, so that's why we're fascinated by what's going on and we think there's more to come.”

Smith said that Rosenberg Research has held a price target of $3,000 or more for some time, and they don’t see much risk of a correction. In fact, they see more momentum coming.

“That early rally in the first part of the year, and then the more recent rally, we're at a point where there've basically been two separate 14% to 15% moves in gold,” he said. “The drivers we saw at the beginning of the year, driving that first 14 or 15% up, was all what we'd call New World gold drivers. We saw enormous demand from central banks, which is still there and still underpinning high gold prices. We're seeing a lot of cautionary demand from emerging markets where risk of de-dollarization is quite real, places like Turkey where inflation is running very, very high. We're seeing key jewelry markets like India seeing enormous income growth. This is all putting real, fundamental tailwinds under the gold price.”

“But the thing that we would have pointed out a few months ago was that the old-fashioned movers of gold, the U.S. dollar and U.S. interest rates, weren't really playing ball yet,” he said. “When that easing cycle started to become more broadly accepted by the market, and the pace of that easing cycle became clear, we were going to see another leg up in gold, and that's what has been delivered leading up to and during the course of the Fed's rate cut.”

Smith noted that traditional gold ETFs have switched from net outflows to net inflows over the past three months. “They're only up about 3%, but the point is they've turned the corner,” he said. “That means that as the median investor starts to realize gold's going to be an important part of the portfolio, as we face more uncertain economic times, that's going to drive the next leg, and is driving the next leg of gold's move.”

Smith added that industrial demand for gold has also been weak of late, but they’re starting to see a recovery there as well.

“That's one of the other fundamental drivers that we see behind gold,” he said. “Those industrial applications move a little bit more with the cycle, and we've seen a pullback in certain types of physical gold demand for industrial purposes weighing a little bit on gold prices over the past say year, that's coming back online a little bit as well, so another reason for bullishness.”

Smith was also asked about the persistent challenges in the mining sector, which have yet to reap the full rewards of gold’s price rally, and he said the situation is improving there as well, in profitability if not in output.

“Miners have been, let's face it, struggling a little bit relative to what the gold price has done,” he said. “We've seen them struggling a little bit to contain costs, and so margins have been a little tricky for them. But output has been very steady, and we think that will continue. Those rising costs actually make it difficult to rapidly increase output for the miners, so again, that's price-supportive.”

“We like the gold miners, by the way,” Smith made a point of saying. “We are seeing 2025 earnings estimates being revised up and up with a lag to the gold price. In 2025, we were going to see earnings growth of around 30% going into the year, or early in the year, now [it’s] up 75%, so lots to come there.”

“That's almost all a price effect,” he added. “The volume is a little more constrained than the market would like it to be, and that's another price driver.”

Pressed on when he expects the yellow metal to attain their lofty $3,000 price target, Smith declined to give a timeframe, but indicated it was sooner rather than later.

“There's the old joke that if you ask an economist, they can only tell you how much or when, but not both, so I would be remiss to say it's going to hit at a particular point,” he said. “But I think now is definitely not a time to stay away from gold, even with the recent move. Now is a time to buy it, there's appreciation potential there. And unfortunately, [with] that negative correlation with geopolitical risk and geopolitical tensions ratcheting up and up and up, more and more people are going to start adding a little bit of gold into the portfolio as that happens, so I won't make any promises as to when, but we think it will get above $3,000 not too far away.”

Smith said the traditional inverse relationship that drives the precious metal’s price action, the one between the U.S. dollar and gold, will also be a major factor behind gold’s run above $3,000. 

“I think there's good reasons for the dollar weakening,” he said. “Obviously, interest rate margins to the rest of the world are being priced down because of the Fed's action and what the Fed communicated last week, so even with other countries cutting, the era of a large divergence between the U.S. economy looking a lot stronger than the rest of the world and that meaning that rates would stay higher for longer in a relative sense in the U.S., is somewhat behind us,” he said. “If you look at the major currencies that constitute the [U.S. dollar index], Canada was 75 basis points further ahead into the cutting cycle than the Fed, and now they're only 25 basis points, and of course, Japan is moving in the other direction.”

“The only other major source of weakness would be the euro, given that the UK is also in quite a hot economic position,” he concluded. “So all of that points to more downside to come for the U.S. dollar, what I would call more coming off a period of a very strong dollar than [one] of fundamental weakness, more of a reset of the dollar’s value compared to the rest of the world.”

Gold prices have continued to build on their standout performances in recent sessions on Wednesday, with spot gold setting a new all-time high of $2,670.60 overnight, and last trading at $2660.06 for a gain of 0.10% on the daily chart.

 

This article originally appeared on Kitco News.