Citi’s Max Layton Explains What Is the Primary Driver for Gold’s Current Rally

In an interview on Bloomberg TV on May 24, Max Layton, Citi’s Global Head of Commodities Research, shared some compelling insights into the future of gold prices. He projected that gold could reach $3,000 per ounce over the next 12 months, driven by several critical factors. Layton’s analysis touched upon the influence of the U.S. dollar, Federal Reserve policies, and, notably, the significant demand from China.

Layton has a robust background in commodities research, having previously worked at Goldman Sachs as Managing Director and Head of European Commodities Research, as well as at Macquarie and the Reserve Bank of Australia. He joined Citi in 2017 and has since been integral in shaping the bank’s approach to commodities, including industrial metals and bulk commodities.

The Impact of the U.S. Dollar and Federal Reserve Policies

Max Layton began by addressing the broader context of the FX markets and the U.S. dollar. According to Layton, metals like platinum, copper, and silver show strong negative correlations with the dollar. The anticipation of multiple Federal Reserve rate cuts this year is a significant driver behind this trend. Citigroup’s research suggests five Fed rate cuts this year, a stance that diverges from the current market consensus, which expects only one cut.

Layton emphasized that lower real rates by the end of this year and into early next year would underpin the next surge in gold prices. He argues that gold, in particular, stands to benefit the most from this scenario due to its historical sensitivity to changes in real interest rates. He believes the projection of gold reaching $3,000 is grounded in this anticipated shift in monetary policy.

China’s “Off the Charts” Demand for Gold

A substantial part of the bullish outlook for gold comes from the unprecedented demand from China. Layton described the current retail demand for gold in China as “off the charts,” noting that he has never seen such significant buying activity in his career. Chinese consumers are diverting a considerable portion of their spending from property to gold, which has dramatically absorbed the available supply.

Layton provided an estimate indicating that around 40% to 50% of the money that would have gone into property is now being funnelled into gold. This shift has led to Chinese retail demand soaking up approximately two-thirds of ex-China mine supply in recent months. Combined with central bank demand, this has left little supply for the jewellery market, further tightening the availability of gold.

Potential Risks and Investment Strategies

Despite the optimistic outlook, Layton acknowledged potential risks, particularly related to China’s import quotas. The Chinese government controls these quotas, which are not publicly disclosed. Any tightening of these quotas could reduce the inflow of gold, posing a downside risk to prices.

Layton highlighted several options when asked about the best ways to invest in gold. While he refrained from giving specific recommendations on equities or ETFs due to regulatory constraints, he pointed to the different ways investors can access gold. These include physical gold, commodities markets, and liquid ETFs available in the U.S. markets.

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