(Kitco News) – While U.S. dollar strength, higher bond yields, equity outperformance and weaker Asian demand will work against gold in the year to come, a number of factors still support the yellow metal’s journey to $3,000 per ounce in 2025, according to Fawad Razaqzada, Market Analyst at City Index.
In their 2025 Gold Fundamental Outlook Preview, Razaqzada wrote that a key driver of the 2024 gold rally was the expectation that central banks would lower interest rates as inflation fell.
“While rate cuts materialised, their impact on gold was moderated by lingering inflation concerns,” he said. “In December, the Federal Reserve enacted an expected rate cut but caused a bit of volatility as it signalled caution for the year ahead due to persistent inflation risks, driven partly by expected US policy shifts, including tax cuts and tariffs under the Trump’s presidency. Similarly, the European Central Bank and Bank of England adopted a cautious approach, citing strong wage growth and inflationary stickiness.”
“As a result, monetary policy is likely to remain tight in early 2025, potentially supporting bond yields and the US dollar— two factors that often work against gold’s appeal,” Razaqzada added.
Higher bond yields have a significant impact on investment demand for the yellow metal, as they raise the opportunity cost of holding non-yielding assets like gold. “Concurrently, the US dollar’s resilience, bolstered by hawkish central bank policies and surprisingly strong economic data, has made gold relatively more expensive for buyers using weaker currencies,” he said. “These dynamics could limit gold’s upside potential in the year’s first half.”
China and India, the world’s two largest consumer markets for gold, are also facing domestic challenges that could dampen demand for the precious metal.
“In China, a depreciating yuan and a sluggish post-pandemic recovery have made gold less affordable,” Razaqzada said. “The yuan’s recent slide to its lowest levels since the COVID-19 pandemic has effectively weighed on demand from an important region, particularly ahead of the Chinese Spring Festival, a period traditionally associated with robust gold purchases. With jewellery accounting for 65% of China’s gold consumption, the combination of weaker consumer purchasing power and economic uncertainty could constrain demand in early 2025.”
Number-two gold market India is experiencing similar challenges. “A recent currency devaluation has eroded their purchasing power, making buck-denominated gold more expensive domestically,” he noted. “This is particularly concerning as India accounts for over 25% of global jewellery demand. The impact of higher gold prices is likely to manifest in reduced consumer spending on the shiny metal, especially among middle-income households, which form a significant portion of the market.”
Even setting aside the currency issues aside, there are major geopolitical risks to consider. “Potential US tariffs on Chinese goods could exacerbate economic pressures, while increased haven demand stemming from global uncertainties may only partially offset these headwinds,” Razaqzada added.
The recent positive correlation between gold and risk assets also complicates the picture.
“Investor sentiment in 2024 leaned heavily toward riskier assets, initially fuelled by rate-cut hopes and then optimism following Trump’s re-election,” he said. “Bitcoin, XRP, and other cryptocurrencies enjoyed meteoric rises, while equity indices like the S&P 500 and German DAX reached all-time highs. This shift in risk appetite reduced the allure of safe-haven assets like gold towards the end of the year, which typically thrive during periods of economic uncertainty – although, in more recent years, both gold and the S&P 500 have been going in the same general direction.”
“Therein lies the problem with gold: can it decouple from risk assets?”
Whether equity markets rise or fall, Razaqzada believes that gold’s long-term appeal will remain intact. “Inflation continues to erode the purchasing power of fiat currencies, reinforcing gold’s status as a store of value,” he noted. “Moreover, geopolitical tensions—from the Middle East to potential trade wars—could rekindle haven demand, providing a counterbalance to last year’s risk-on sentiment.”
The question on the minds of many investors is whether the gold price can break the 3k level in this environment. Razaqzada believes that it can.
“Despite short-term challenges, a $3,000 gold price target remains feasible,” he said, added that any corrections or consolidations in the early part of 2025 will likely set the stage for another rally in the second half.
“Thanks to gold’s strong performance in 2024, any significant price declines could attract bargain hunters and long-term investors, who either took profit or missed out on the big rally,” Razaqzada wrote. “These factors should help to stabilise the market and pave the way for future gains.”
Major macroeconomic shifts and heightened geopolitical risks will also play a pivotal role in determining gold’s trajectory next year.
“For instance, the unwinding of the “Trump trade”—a phenomenon characterized by a strong US dollar and robust equity markets—could weaken the dollar and bolster gold prices,” he concluded. “Additionally, central banks, which slowed their gold purchases as prices peaked in 2024, may resume buying if prices correct meaningfully in 2025.”
