Dollar weakness and ETF flows fuel gold 

Gold continued its uptrend in February, hitting multiple new highs before pulling  back to end the month at US$2,835/oz – up 0.8% m/m.1 This performance was  echoed across major currencies, all of which also registered new record highs (Table 1). General interest in gold was bolstered by continued flows of gold into  COMEX inventories, driven by continued tariff uncertainty. 

Gold hit new highs during the  month, supported by a weaker US  dollar, extending its y-t-d gains to  9percent According to our Gold Return Attribution Model (GRAM), US dollar weakness  during the month was one of the primary drivers of gold’s performance,  alongside an increase in geopolitical risk and a drop in interest rates (Chart 1).  And while gold’s strong price appreciation in January created a small drag, it was  counterbalanced by positive support from flight-to-quality flows. This was best  illustrated by gold ETF activity, which saw massive net inflows of US$9.4bn (100t) – the strongest month since March 2022 – led by US- and Asian-listed funds.  

Reassessing risk and reward 

• The “Trump trade” – stronger dollar and US stocks – has  taken a back seat amidst concerns about tariffs and hawkish foreign policies, conditions that will likely remain 

• As governments look to increase military spending,  budgets deficits are likely to increase and credit ratings to fall 

• At the same time, despite inflationary pressures, markets  expect a more dovish Fed, pricing in at least two full rate  cuts by the end of the year  

• These factors combined are creating a particularly  supportive environment for gold.  

Risk-off in, risk-on out

The “Trump trade” – which hinged on the pro-US growth  agenda of the new administration and fuelled a dollar and  stock rally post US election – appears to have faded. 

While European stocks continue to do well, the major  beneficiaries have been risk-off assets such as US Treasuries  and gold (Chart 2). 

Inflation is bubbling up 

Trump‘s campaign agenda hinged on a few key items,  including: tariffs, immigration and tax cuts2 – all of which  have the potential to flare up inflation However, assessing the economic impact of tariffs is not  straightforward: while they might be inflationary in a very  strong economy, they could lower spending in a weaker  one.³ And there are already signs that consumer sentiment  in the US is beginning to falter: the University of Michigan  consumer and expectation surveys are at their lowest level  since 2023.⁴ 

Lower levels of immigration (and higher deportations) will  likely lead to higher labour costs, although the strength of  the labour market is key to determine its full effect. Nominal  wages in the US are currently plateauing while potential  large-scale Federal layoffs could increase labour supply.  However, those workers are unlikely to fill the spaces left by  immigration. 

Tax cuts for businesses and the wealthy will boost growth  and inflation. However, any anticipated boost from tax cuts  has yet to materialise as they may take ‘months to  negotiate’.⁵ 

Uncertainty, uncertainty, uncertainty 

Investor nervousness has pushed bond prices higher and  yields lower. Market participants now expect two full rate  cuts by the end of the year…a far more dovish read from  mid-January, pre-Trump inauguration. And the probability of  a Fed hike appears to have peaked .

While January inflation data generally runs hot, policymakers  at the Fed seem content with the progress that has been  made so far. At the same time, elevated uncertainty was  heavily cited in the last meeting minutes, whether through  tariffs, immigration or domestic policy, such as potential  large-scale Federal layoffs, a nod to the Fed’s dual mandate  of price stability and full employment.

What’s more, US Treasury Secretary Bessent’s comments  that they are focused on bringing down the 10-year yield has  also served to ease conditions somewhat.

New world (dis)order?

Negotiations to end the Russia-Ukraine war have led to  much handwringing and consternation, particularly across  Europe during February. This has compounded already  elevated geopolitical uncertainty as positive outcomes are by  no means guaranteed and existing political alliances are  being questioned. 

Speculation that Europe will need to ramp up defence spending going forward – resulting in larger deficits – has  already pushed up borrowing costs. Yield curves on  European sovereign debt have become increasingly steep;  short-term rates are falling while long-term rates remain  high as expectations grow for an increased supply of long dated debt.

The UK has already committed to increase defence funding,⁸ and Germany’s future chancellor, Friedrich Merz, has begun  discussions on the topic.⁹ For the latter, this could be further  

complicated by the potential need to rely on the support of  fringe parties after a somewhat mixed election outcome.¹⁰ The performance of the European defence sector, one of the  best this year, is reflecting the likely continuation of this  trend.  

Should a resolution to the Russia-Ukraine war be found –  and importantly, this will need to be one agreeable to all  parties – this could dampen any geopolitical risk premium in  gold. But it remains to be seen whether real progress can be  made and, if so, what the implications will be. Until then, it is  likely that gold will remain well supported. 

Perfect conditions for gold? 

Uncertainty appears to be the undertone across markets.  Concerns over tariffs, and the wide-ranging impact they  could have on global growth, continue to cast a cloud and  question US exceptionalism. This has added to already rising  geopolitical risk. Recent events have highlighted the need for  greater military spending, which will likely result in even  higher deficits. 

There are several factors that could reinstate the thorny  problem of higher inflation, especially at a time when  deteriorating economic conditions may necessitate interest  rates staying low. The US economy is likely in ‘stagflation’ and  consumers appear to see it that way.

Historically, each of these drivers has individually been  positive for gold. A move up in the GPR index of 100 points  is typically linked to a 2.5% increase in the price of gold, all  else equal. Similarly, a rise in 10-year break-even inflation  expectations of 50bps is typically associated with an approx.  4% rise in gold prices. And a 50bps fall in 10-year Treasury rates over the long-run has been associated with a 2.5% rise  in gold. 

Although these drivers seldom occur simultaneously, their  combined effect can create an environment in which gold  can continue to perform positively.  

It is worth noting, nonetheless, that a solid fundamental case  for gold still must scale the hurdle of a temporary technical  stretched price. A retracement may create short-term  headwinds but could also provide a welcome respite for uninitiated investors, as well as for consumer gold demand . In all, we expect gold to remain in the limelight  given the current market conditions.