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Dec 13, 2024

WGC Gold Outlook 2025 Navigating rates, risk and growth

 A fine line influenced by rates, risk and growth


Gold is poised for its best annual performance in more than a decade – up 28% through November. Behind this, central bank and investor buying have more than offset a notable deceleration in consumer demand. Asian investors have been a near constant presence, while lower yields and a weakening US dollar in Q3 fueled Western investment flows. However, it is gold’s role as a hedge amidst rising market volatility and geopolitical risk that most likely explains its remarkable performance.


As we look forward, all eyes are focused on what Trump’s second term may mean for the global economy. Thrill-seeking investors may benefit from an early wave of risk-on flows, but potential trade wars and inflationary forces may spill over into an expected subpar economic growth.


The market consensus of key macro variables such as GDP, yields and inflation – if taken at face value – suggests a positive but much more modest growth for gold in 2025. An upside could come from stronger than expected central bank demand, or from a rapid deterioration of financial conditions leading to flight-to-quality flows.


Conversely, a reversal in monetary policy, leading to higher interest rates, will likely bring challenges. In addition, China’s contribution to the gold market will be key: consumers have been on the sidelines while investors have provided support. But these dynamics hang on the direct (and indirect) effects of trade, stimulus and perceptions of risk.


2024: A record year

The gold price has increased by more than 28% y-t-d in US dollars, trading 22% higher on average this year than during 2023; its performance across currencies was equally strong (Table 1). Gold reached 40 new record highs y-t-d and total gold demand in the third quarter surpassed US$100 billion for the first time.


Investment demand, especially through over-the- counter transactions, was supported by an undercurrent of geopolitical risk and volatility in many regional financial markets. Central banks continued to add gold to reserves y-t-d, even picking up speed in early October. And, for most of the third quarter, Western investors flocked back to gold as central banks started cutting interest rates.


2025: A tale of two halves?


Sort of landing

All eyes are on the US. Trump’s second term may provide a boost to the local economy but could equally elicit a fair degree of nervousness for investors around the world.


As we look into 2025, market consensus suggests that the Fed will deliver 100 bps in cuts by year end, with inflation softening but still above target. European central banks will also likely cut rates by a similar amount. The US dollar is expected to remain flat or slightly weaken as conditions normalise, while global growth remains positive but continues to grow below trend.


In this context, the actions of the Fed and the direction of the US dollar will continue to be important drivers for gold. But just as the past few years have shown, these two are not the only factors that determine gold’s performance. We instead rely on a more robust framework that allows us to capture the contribution of all sectors of gold demand and supply.


Specifically, we look at the role of:

· Economic expansion – and its direct effect on consumer demand.

· Risk and uncertainty – as a trigger for flows from investors looking for effective hedges.

· Opportunity cost – making gold more (or less) attractive relative to bond yields.

· Momentum – which can boost trends or, equally, mean-revert them.

 

 

Our analysis based on QaurumSM suggests that, if the economy were to perform according to consensus in 2025, gold may continue to trade in a similar range to that seen in the last part of the year, with the potential for some upside.


As we discussed in our mid-year outlook, this implied performance likely indicates that gold is efficiently reflecting all the currently available information.


Risk-on/risk-off

Trump starts his second term in late January but the US stock market is already banking on a pro-business agenda with a near 7% increase since early November. Tech stocks (and the Magnificent 7) have done even better.


A more business-friendly fiscal policy combined with an America-first agenda is likely to improve sentiment among domestic investors and consumers. This will likely favour risk-on trades in the first few months of the year. The question, however, is whether these policies will also result in inflationary pressures and disruptions to supply chains. In addition, concerns about European sovereign debt are once again mounting, not to mention continued geopolitical instability, particularly in light of the events in South Korea and Syria in early December.


In all, this could prompt investors to look for hedges, such as gold, to counter risk.


The Fed on a tightrope

Monetary policy is limited in scope and its effects take time to become evident, complicating the decisions made by central bankers about whether to continue, pause or reverse the course of a given policy.


The Fed is aiming to engineer a hard-to-come-by soft landing. It has so far managed to cool inflation without taking the wind out of the sails of the economy. But 2025 will likely not prove easy.


There are many reasons why inflation can rebound, but the economy is still not strong and a reversal in policy could deteriorate credit conditions. If the Global Financial Crisis taught us anything, it is that when issues in the system start to unravel, they unravel fast!


Historically, gold has risen by an average of 6% in the first six months of a rate cut cycle. Its subsequent performance has been influenced by the length and depth of that cycle. Overall, a more dovish Fed will be beneficial for gold, but a prolonged pause or policy reversal would likely put further pressure on investment demand.

 

Can Asian demand continue?

China and India are gold’s largest markets. More generally, Asia makes up more than 60% of annual demand (excluding central banks). Its contributions to performance can’t be understated.

This year, Asian investors added to gold’s performance, particularly during the first half, and Indian demand benefitted from the reduction in import duty in the second half.


However, the risk of trade wars looms large. Chinese consumer demand will likely depend on the health of economic growth – whether through normal means or government stimuli. And while the same factors that influenced investment demand in 2024 are still present, gold may face competition from stocks and real estate.

 

India seems to stand on a better footing. Economic growth remains above 6.5%, and any tariff increase will affect it less than other US trading partners given a much smaller trade deficit. This, in turn, could support gold consumer demand. At the same time, gold financial investment products have seen remarkable growth and while they make up a small portion of the overall market, they have been a welcome addition to gold’s ecosystem.


Central banks as buyers

Central banks have been net buyers for almost 15 years (Chart 3). 2 The importance of gold in foreign reserves is well recognised: the role it plays as a long- term store of value, as a diversifier, its performance in times of crises, and the fact that it does not carry credit risk. In an environment of ever-increasing sovereign debt and geopolitical uncertainty, gold’s role is well cemented.


While central bank demand will likely end the year below previous records, it has remained strong, positively contributing to gold’s performance to the tune of 7%–10%. Equally, central banks will remain an important part of the puzzle. Central bank buying is policy driven and thus difficult to forecast, but our surveys and analysis suggest that the current trend will remain in place. In our view, demand in excess of 500 tonnes (the approximate long-term trend) should still have a net positive effect on performance. And we believe central bank demand in 2025 will surpass that. But a deceleration below that level could bring additional pressures to gold.

 

Conclusion

Our analysis, based on QaurumSM, examines gold’s potential reaction to underlying market conditions based on the current consensus as well as a more bearish and bullish scenarios. 

Gold is likely to remain rangebound if existing market expectations are correct. However, a combination of higher rates and lower economic growth could negatively affect investors and consumers. This could be particularly evident in Asia. Conversely, significantly lower interest rates, or a deterioration in geopolitics or financial market conditions will improve gold’s performance.

Finally, a key checkpoint will be central bank demand as it will continue to provide a boost to gold if it remains at a healthy level.


Gold’s final price performance will depend on the interaction of gold’s four key drivers: economic expansion; risk; opportunity cost; and momentum.






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