(Kitco News) - Although global interest rates are expected to continue declining in 2025, creating a tailwind for gold, the outlook heading into the new year is somewhat muddled, according to the latest report from the World Gold Council (WGC).
The WGC noted in its 2025 Outlook report, published Thursday, that the gold market faces two distinct scenarios next year as uncertainty dominates investor sentiment. However, its base case anticipates relatively neutral price action if current market conditions persist.
Gold’s precarious outlook comes as prices have climbed back to $2,700 an ounce, with the metal on track to end the year up nearly 30%, marking its best rally in decades. Sentiment around the precious metal has shifted slightly compared to this time last year. Heading into 2024, investors were fairly optimistic that gold would perform well as markets priced in aggressive rate cuts from the Federal Reserve.
Despite a prolonged hawkish stance, gold achieved consecutive record highs throughout the year as central bank demand dominated the marketplace. At the same time, Asian consumer demand served as a significant pillar of support during the first half of the year. By summer, as Asian demand cooled, Western investors entered the market, providing fresh support at record highs as the Federal Reserve embarked on its long-awaited easing cycle.
Looking ahead, analysts at the WGC said their modeling suggests the gold market will be much more nuanced as investors gauge the health of the global economy.
“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. 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,” the analysts said in the report.
The WGC highlighted that a major risk for gold remains President-elect Donald Trump’s uncertain economic policies, including his proposed tariffs to support domestic manufacturing, which threaten to push the global economy into a trade war.
Many economists have noted that higher trade tariffs could drive already stubborn inflation higher, potentially impacting the Federal Reserve’s current monetary policy stance. Markets have already begun paring back their expectations for interest rate cuts in 2025. Bank of America predicts only two rate cuts next year, while Wells Fargo forecasts just one.
“In this context, the actions of the Fed and the direction of the US dollar will continue to be important drivers for gold. But 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,” the analysts said.
On the positive side, the WGC noted that investors should continue to pay close attention to Asian consumer interest, which helped drive prices to record highs as the Federal Reserve maintained its restrictive monetary policy in the first half of 2024.
“This year, Asian investors contributed to gold’s performance, particularly during the first half, and Indian demand benefited from the reduction in import duties 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,” the analysts said.
Finally, the biggest source of support for gold remains central bank demand. The WGC expects central banks to continue buying gold even if the pace slows from recent years.
“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,” the analysts said.
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