(Kitco News) – Gold was the stand-out exception to broad commodity weakness this year, and it looks likely to deliver another strong performance in 2025, but the yellow metal will have to contend with rising bond yields as central bank easing slows, according to economists at Westpac.
In their December-January Market Outlook, Westpac Group economists Luci Ellis and Illiana Jain warned that 2025 will be the year that global governments’ expansive fiscal policy will confront rising bond yields, and rate cuts are now at greater risk.
“How far central banks ease depends on demand conditions and how they feed into inflation pressures once the current pandemic-related surge in inflation unwinds,” they wrote. “Fiscal policy is an important factor in this, and a range of actions and reactions are driving policy in an expansive direction in many developed economies. These include: increased defence spending as a reaction to geopolitical risks and the incoming Trump administration’s expectations of its allies; increased health spending as a reaction to population aging; and increased investment in energy infrastructure as a reaction to the challenges of climate change.”
The economists said that with the U.S. federal deficit already running at 6% of GDP for the last few years, the fiscal situation was going to worsen regardless of who won the Presidency. “At the margin though, Trump’s victory and the Republican clean sweep adds to the stimulatory stance, the mix set to favour lower taxes and lower government spending, they said. “The reaction to looser fiscal policy – and a tilt towards investment versus saving more broadly – has been and will continue to be seen in yields.”
“Bond yields in advanced economies are already noticeably higher than pre-pandemic, and we expect that to continue,” they added.
Turning to precious metals, Westpac senior economist Justin Smirk noted that gold prices enjoyed a strong 30% rally in 2024 before entering a consolidation range of $2,550 – $2,750 per ounce following Trump’s reelection. “If we saw a fourth consecutive 0.3%mth increase in the US CPI, that would likely cement a more cautious stance from the Fed and could place some downward pressure on gold,” he said.
“However, at the same time, we would argue that any downside for gold is ultimately contained by the ongoing conflict in the Middle East with the rapid fall of the Syrian government, alongside a very mature run up in Bitcoin,” Smirk wrote. “We also see a longer-term structural bid for gold with the PBOC adding bullion to its reserves for the first time in seven months.”
“We have a medium-term target of around US$2,700/oz through 2025,” he concluded.
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