Emerging market central banks have been major buyers of gold and are likely to remain so over the medium to long term. Since the Global Financial Crisis, the central banks of the advanced economies have largely ceased selling their gold holdings.
In the long term, Asian central banks are likely to remain net buyers of gold as their currencies become more freely floating and their strategic focus changes from maintaining currency competitiveness to improving risk-adjusted returns on assets.
Although ANZ currently forecasts a short term weakening of the gold price, it sees the finite supply of gold underpinning a long term increase in its value.
There has been a revival of the gold price from the lows of the 1990s and a resumption of gold's historic role as a defensive asset and store of value during the global financial crisis.
China's increasing role in price setting
Like much of the Asia Century narrative, China will play a bigger role in gold pricing due to its increasing size and importance in the global gold market.
ANZ forecasts the Shanghai Gold Exchange and Shanghai Futures Exchange will continue to build market share in gold trading, amplified by the growing role of the Renminbi in global trade.
With China both the world's largest producer and consumer of physical gold, there is no reason why Shanghai should not become a major centre for gold trading provided the appropriate institutional and legal reforms take place.
Outlook for the gold price – onwards and upwards
The gold price will depend on global economic growth, the level of real interest rates, the actions of central banks and whether China successfully makes the transition to an open economy.
Under ANZ's central case, gold will rise to over $US2,000/oz by 2025 and $US2,400/oz by 2030.
In the nearer term however, prices could remain contained as exchange traded funds continue to exert downward pressure on prices.
Further out, growing wealth in Asia, increasing gold investment by money managers in the region, and expanding gold holdings for central banks in emerging markets will support a continued appreciation of the gold price.
ANZ Research believes an even more bullish case for gold is the next most likely outcome. If China's shift to a more open economy is bumpy and global financial instability continues, there will be strong demand for physical gold, which could see prices rise as high as $US3,230/oz by 2030.
Under a downside scenario for gold, in ANZ's view the least likely to occur, if there is a long run of growth with moderate inflation and rising real interest rates, global asset markets will perform strongly and investment demand for gold will fall.
Given the steady increase in productive capacity for gold over the past decade, the price of gold under this scenario could fall to $US900/oz in 2020 and remain subdued for the forecast period.
In summary, in real (inflation-adjusted) terms, under our bullish case, gold will reach a new record high. Our central case will only see gold prices exceed the 2011 high in real terms after 2030.