Why record-setting gold prices will fend off headwinds and see 30% more upside, according to famed economist David Rosenberg

Gold's recent rally has puzzled as macro headwinds typically weigh on gold prices. But David Rosenberg sees a 30% more upside ahead.

• Gold poised to hit $3,000 per ounce as upcoming Fed rate cuts occur, top economist David Rosenberg says.
• That implies a potential 30% upside from current levels.
• He says the current rally is impressive because it defies typical macroeconomic challenges like a strong dollar and falling inflation expectations.

While investors have been riding high on a record-breaking stock market, their favorite safe haven has also reached new peaks.

Gold prices reached a historic $2,328.7 per ounce last week, and one economist says the momentum could carry the yellow metal to $3,000 before the next business cycle shift — a 30% increase from current levels.

That's according to famed economist David Rosenberg, the president of Rosenberg Research. He said in a recent note that the latest gold run is "especially impressive," because the recent rally not only surpassed bitcoin and every major currency, but also overcame typical macro headwinds that often depress its value.

"The rise in the gold price has come at a time of dollar strength, falling inflation expectations, and during which the Fed has moved market expectations toward a 'higher for longer' conviction. All those developments would typically hurt the gold price, but it's forged ahead regardless," his team wrote in the note. 

But before plunging into the hype around bullion's future, it's worth peeling back what's behind the recent surge. 

Strong demand

Rosenberg and his team said the major driver of the latest highs wasn't so much on the supply side — which has been steady in recent years — but rather on the demand side, thanks to central banks' reembrace of it as a reserve asset. 

With the Chinese yuan losing its grip as the world's second reserve currency, and as nations like Japan, Russia, Turkey, and Poland fear overreliance on US dollars, many have turned to gold for security as they weathered idiosyncratic economic risks. 

"After divesting from gold in the early part of the century (physically backed reserves were oh so passé), central banks are once again building up their gold holdings, and at scale," he said, adding that central banks bought 361 tonnes of gold in the third quarter of 2023, a turnaround from -77 tonnes in 2022's same period.

They also found gold shines more in emerging markets like India and China, while Western investors lag behind as high interest rates and booming stock prices dim lower-yielding gold's allure.

Besides, rising industrial usage especially within the highly active electronics sector, is another price pusher.

"The boom in circuitry manufacturing as producers work around the clock to meet the insatiable asset for AI-related models is certainly a tailwind for physical gold demand that will not disappear anytime soon," the note said. 

Fears over uncertainties

Rosenberg also attributed gold's recent rally to global geopolitical risks and unpredictable macroeconomic outlook.

"That the direction of travel for international relations toward greater militarization, confrontation, and polarization is difficult to argue against, and the risk hedging features of gold price have risen in importance as a result," he said.

On the monetary side, he said — with the US debt-to-GDP ratio hitting 120%, and servicing costs escalating — investors are boosting gold holdings amid uncertainty over election outcomes and the looming possibility of a fiscal crisis.

Next stop: $3,000

As gold's steadfast momentum persists, Rosenberg anticipates another 15% upside with a potential 30% in play as central banks begin to cut rates. He cites the precious metal's historically negative correlation with gold prices.

The economist laid out two scenarios, both at which arrive at the conclusion that gold has further to rise: a "soft landing" and a typical bear market. 

In a "soft landing" scenario, assuming global real interest rates return to their pre-2000 averages—higher than the post-GFC stagnation era—this would lead the US dollar to drop by approximately 12% and push up gold prices by about 10%.

But if a recession hits the economy—with global real interest rates reverting to their 2014-2024 average, stock markets stabilizing, and the dollar depreciating by around 8%—the upside for gold is more like 15%, putting it in the $2,500 range.

"Putting those observations together with our modeling exercise tells us that downside risk to the gold price is limited, but there is a lot more room to rise. It's far more likely that gold reaches $3,000 per ounce than falls back to $1,500," he said, adding that rising geopolitical tensions would further drive gold prices higher.

"The read-through for investors is straightforward: make sure you have gold in your portfolio, and overweight it. The downside risks are well contained (though a very near-term correction is not impossible and should be looked through), but the upside is tantalizing," Rosenberg concluded.