Goldman Sachs has increased its year-end gold forecast to $3,700 per troy ounce (toz), citing stronger-than-expected central bank demand and heightened recession risks impacting ETF inflows.

The investment bank, whose previous year-end forecast was $3,300, said it expected central bank demand to average 80 tonnes per month, up from its previous assumption of 70 tons and well above the pre-2022 baseline of 17 tons per month.

The bank also noted a surge in gold ETF inflows, driven by fears of a recession, with its economists assigning a 45% probability to a U.S. recession in the next 12 months.

Spot gold has continued its rally from the last year, hitting multiple record highs and gaining more than 23% so far this year. Bullion breached $3,200 an ounce for the first time on Friday.

The bank's analysis also said that in the medium-term, the risks to their upgraded forecast remain skewed to the upside. If central bank buying averages 100 tons/month, Goldman estimates that gold could reach $3,810/toz by end-2025.

On the ETF side, if a recession occurs, ETF inflows could revert back to pandemic levels, supporting prices towards $3,880/toz by year-end.

However, if economic growth outperforms expectations due to reduced policy uncertainty, ETF flows would likely revert back to their rates-based prediction, with year-end prices closer to $3,550/toz, Goldman said.