Article Summary:

• Gold prices decline nearly 11% in under two weeks, attracting investor attention.
• Natixis warns of potential further downside in gold prices.
• Three potential downside scenarios outlined, focusing on production costs, reduced central bank demand, and ETF outflows.
• Potential support from strong Chinese demand and jewelry buying.
• Prices expected to consolidate in 2026 with upside risks remaining.

Gold Price Outlook: How Low Can It Go?

Gold prices have experienced a notable decline in under two weeks, piquing the interest of some buyers. However, market analyst Bernard Dahdah of Natixis cautions investors that gold could still see further downside. The question now is: how low can it go?

Potential Downside Scenarios

Dahdah presents three potential downside scenarios for gold in his latest research note:

1. Ultimate Floor: Dahdah notes that the ultimate floor for gold lies near production costs, around $2,000 per ounce. This is slightly above the mining sector's average all-in sustaining costs of around $1,600 per ounce.
2. Weakening Central Bank Demand and ETF Outflows: Higher gold prices could lead to reduced demand from central banks, while gold ETFs could experience further outflows. In this scenario, gold prices could be pushed down to $2,800 per ounce.
3. Stable Investment, Cooling Central Bank Buying: If investment demand remains relatively stable, but central banks temper their purchases, gold prices could test support near $3,450 per ounce.

Potential Support from China

Despite these scenarios, Dahdah believes they are unlikely to materialize, given the changes in the gold market in recent years. He points out that Chinese investors would buy aggressively if prices fell below $3,400 per ounce, and that jewelry demand would also see a strong rebound.

Moderate Outlook for 2026

While Dahdah highlights the downside risks, his base case is that gold prices will range around current levels throughout 2026. He anticipates an average gold price of around $3,800 per ounce next year.

Lack of Momentum to Break $4,000

Dahdah believes that the market currently lacks the momentum to support a sustained break above $4,000 per ounce. He explains that the previous rally above this level was partly driven by a short squeeze, which has now largely unwound. For sustained gains, we need to see an increase in demand, which is not present at current prices. Furthermore, previous expectations of a significant weakening of the dollar and the U.S. economy now appear unlikely.

Easing Central Bank Purchases

Dahdah notes that central bank purchases, while still elevated, are expected to continue to slow as gold prices remain high. Analysts anticipate that global central banks will buy around 900 tonnes of gold this year, slightly below the average annual rate of 1,000 tonnes over the past three years.

Upside Risks Outweigh Downside Risks

Despite Natixis' relatively neutral outlook for the new year, Dahdah states that he believes the upside risks for gold outweigh the downside risks. He anticipates that investment demand will remain the primary driver of the gold market in 2026. He adds that any volatility in the bond market could prompt investors to shift funds out of short-term money market funds, which could drive gold prices 10% higher. He concludes that the market is filled with uncertainty and the increasing U.S. government debt presents a situation worth watching.