With gold topping the $2,000 mark this week, Citi economists have clarified exactly what they think is driving the surge in the precious metal — and what it could tell us.
While there are doubts gold will hit the $3,000 mark, economists at investment bank Citi said in a note Thursday that they believed the metal could reach $2,100 an ounce this quarter, and $2,300 in the next six-to-12 months, with "risks skewed to the upside."
However, they clarified that the gold rally was not forewarning of a "burst of inflation," as some might suspect, despite central bank stimulus and rising private sector credit growth.
"The monetary theory of inflation has been replaced by labor and product market micro theories, and market pricing of inflation risk is low," the economists led by Catherine Mann said. "So Gold is not presaging inflation."
The gold rally was also not an indicator that the dollar would lose its crown as the "premier international reserve asset."
The economists said that while some have suggested gold's rise traces the depreciation of the dollar, "no other currency or country is ready or willing to take on the dollar's role."
In fact, the U.S. Federal Reserve's "massive provision" of dollars in currency exchanges with other countries — also known as "swap lines" — reinforces its position as the world's reserve currency.
"Even if the dollar is now worth less in gold terms so too are all the other currencies," they said, meaning its "exorbitant privilege remains."
At its core, the economists said the rally in gold was being driven by central banks' monetary easing, which had resulted in negative real yields. This is when the return investors get on bonds is equal to or below the rate of inflation. This has reduced the "opportunity cost of holding a zero-coupon asset such as gold."
Nevertheless, they added that all of the above factors, and more, had a role to play in sustaining the gold rally.
Guy Foster, head of research at Brewin Dolphin, agreed that what was driving the gold rally was negative real yields. These indicate the "market's expectation of where inflation's going to be relative to where interest rates are going to be," he told CNBC's Squawk Box Europe on Friday.
"And the trade here is to say that the Federal Reserve and other central banks will not be able to raise interest rates because of high unemployment, even as inflation starts to pick up," Foster added.
He said it was reasonable to expect inflation to rise to around 3%, which is the "best part of a minus 3% real yield for investors."
"In that situation, you would expect gold to perform extremely well," Foster added.