Large asset management companies expect that in the most optimistic scenario, Gold prices will reach at least the 3000 mark this year; even in the most pessimistic scenario, a key factor can help Gold find bottom support.

The year 2024 is undoubtedly a spectacular year for the Gold market. The intensifying geopolitical tensions, the growing demand for Gold from Asian Consumers, and the strong purchases of this Precious Metal by central banks have driven Gold prices to set 41 new closing records in the first ten months, reaching a historic high of $2790 per ounce by the end of October.

Despite a slowdown in Gold momentum by the end of last year due to Trump's victory in the USA elections, which pushed up risk assets and the dollar, State Street believes there is still room for Gold prices to rise in 2025. The bank predicts that Gold prices will fluctuate between $2600 and $2900 per ounce in 2025, with the potential to rise to $3100 per ounce.

Overall, the bank has three major bullish reasons for Gold:

1. The central bank's enthusiasm for purchasing Gold will continue, helping to offset the negative impact of a strong dollar on Gold prices;

2. The consumer demand in China and India is growing, with local gold Mutual fundsand the increase in ETFs, along with regulations encouraging the holding of Gold, are driving demand;

3. Loose monetary policies and the fiscal policies of the Trump administration may increase the USA's deficit and drive inflation, which will reduce the appeal of purchasing Gold compared to the dollar or US Treasury bonds.opportunity cost。

The US stock market is expected to perform well again in 2024, as the rise following Trump's election and pro-business policies have enhanced market risk appetite; however, concerns about inflation, rising government debt, and intensifying geopolitical tensions remain.

State Street's research on Gold ETF in 2024 shows that high-net-worth investors have nearly doubled their allocation to Gold in the past year, viewing it asIts price has soared to a historic high, closely related to market expectations of interest rate cuts by the Federal Reserve.. State Street expects that this trend will continue even in 2025, when the Capital Markets exhibit a risk-seeking attitude, as the price supports for Gold and its status as a safe-haven asset will continue to enhance the appeal of Gold as a core investment portfolio asset.

Does a strong dollar harm gold?

Gold is an asset priced in dollars, so a strong dollar can sometimes act as a resistance. However, this pattern has been broken in recent years due to unprecedented purchasing actions by central banks.

Since 2022, central banks are expected to have purchased a total of 2,700 tons of gold, which is close to the fastest pace in history. In the last three years, despite soaring gold prices in dollar terms, central banks continued to buy, indicating that their purchasing is driven more by long-term strategic considerations rather than sensitivity to price. State Street expects that central banks will continue to increase their gold reserves in the coming year.

The negative correlation between gold and the dollar has also been misunderstood in recent years. Since 1973, during periods of a dollar bear market, the average cumulative ROI for gold has been 133%, while the return during periods of a strong dollar has been -9%. History shows that in the long term, the benefits of holding gold to combat currency depreciation may outweigh the drag caused by a strong currency.

In fact, despite the current strength of the dollar, reminiscent of the turn of the century, gold accumulated an appreciation of 813% during that period.

De-dollarization: Preparing for the worst-case scenario?

The rise in geopolitical tensions and some countries reducing the dominance of the dollar in trade and global finance cannot be underestimated.

Especially in Emerging Markets, central banks have net bought Gold for 15 consecutive years, diversifying their dollar-dominated reserves. This buying pace accelerated when international trade relations worsened during Trump's first term. This laid the foundation for more countries to view Forex diversification as a National Security issue. In 2022, after the USA 'weaponized' the dollar through financial sanctions against Russia, the pace of central bank Gold purchases further intensified. Now, central banks in developed countries have also become public buyers of Gold.

Central banks rarely disclose specific Gold allocation targets, but the National Bank of Poland is an exception; it announced its strategic intention to increase the proportion of Gold reserves from 13% in 2023 to 20%. It purchased 130 tons of Gold in 2023 and 61 tons in 2024.

Poland's actions highlight the role of Gold as a safe-haven asset, which is not affected by credit risk and does not depreciate due to the economic policies of other countries. This increases the likelihood that other developed central banks may follow suit and expand their Gold reserves.

Trump Effect

The market's reaction to the outcome of the 2024 USA presidential election is positive, possibly believing that Trump is more likely than Biden to mediate a reconciliation between Russia and Ukraine. While the prospect of ending the conflict is undoubtedly welcome, it does not mean that the push to reduce the dollar's dominance globally will fade, nor does it mean that countries will slow down their efforts to de-dollarize. In fact, the tariff policies proposed by Trump could once again exacerbate the trend of de-dollarization.

During his first term, Trump's protectionist trade policies accelerated the de-dollarization efforts of global central banks. In March 2018, he imposed tariffs of 25% and 10% on steel and Aluminum imports from all international suppliers, leading to a surge in Gold demand.

Trump warned that if BRICS countries sought to reduce the dollar's dominance in trade and global finance, he would raise tariffs on them. However, this move by Trump could trigger retaliatory measures, disrupt global trade, and force multinational corporations to quickly adjust their supply chain strategies.

Growing demand for Gold in the Asia-Pacific region.

Another long-term driver of Gold demand comes from the Asia-Pacific region. Over the past thirty years, the massive economic growth in this region has increased per capita income and stimulated investment. From 1990 to 2023, per capita GDP in the Asia-Pacific region more than doubled, and its contribution to global GDP growth increased from approximately one-quarter to over two-thirds.

The number of Gold Funds in India and China has rapidly increased, sparking investor enthusiasm. In these two countries, Gold holds significant cultural importance, and consumers have long viewed Gold as a store of value and a hedge against inflation. Since 2005, Gold Funds in the Asia-Pacific region have grown from three to 128, attracting over 23 billion dollars in funding.

The Indian government is encouraging investment in Gold Mutual Funds and ETFs by reducing the long-term capital gains tax from 20% (with indexation) to 12.5% (without indexation), and by cutting the holding period from 36 months to 12 months. India is also promoting the jewelry industry by reducing the Gold import tax from 15% to 6%.

China's economic stimulus measures have led to a significant rise in the stock market, while also lowering mortgage rates. These trends may increase consumer savings and investment in Gold Funds. However, since 2025 is the "Year of the Snake", which may not be widely considered an auspicious time to hold weddings, demand for jewelry might cool.

State Street also believes that as investors seek protection from strong stock market returns in 2024, demand from Japanese consumers for Gold may increase in the coming year. Regulatory changes concerning mutual funds and ETF investments by the Japanese government may also result in an increase in Gold-backed investment products over the next year.

Rising deficits may enhance the attractiveness of Gold as a safe-haven asset.

Monetary and fiscal policies in the USA in 2025 could also influence the direction of Gold. The true impact cannot be known until the specific scale of tariffs and tax policies becomes clear. The Fed predicts further interest rate cuts in 2025, but the exact number will depend on the strength of the economy and the extent to which fiscal policy increases inflationary pressures and the federal deficit.

Fiscal deficits driven by government borrowing and spending create a series of economic conditions favorable to Gold. These conditions include high inflation expectations, currency devaluation, and increased uncertainty surrounding the government's ability to repay debt. When fiscal deficits coincide with a loose monetary environment, State Street expects that by 2025, the opportunity cost of holding Gold relative to buying government bonds will decrease, enhancing its relative appeal as a safe-haven asset.

State Street noted the impact of the federal government's financial situation on Gold, which was particularly evident during the Clinton and Bush administrations.

During President Clinton's two terms from 1993 to 2001, a fiscal surplus was established through tax increases and reduced defense spending, leading Gold into a long-term bear market, dropping by 19.9%. Additionally, the allure of Gold further diminished at that time due to the tech stock boom and the strength of the dollar.

In stark contrast, during President George W. Bush's term from 2001 to 2009, Gold prices rose by 221.2%. During that period, federal government spending caused the federal government's total debt as a percentage of GDP to surge by 50.44%, while the Federal Reserve's accommodative monetary policy, as well as economic and foreign policies, weakened the dollar and exacerbated geopolitical tensions, contributing to the rise in Gold prices at that time.

Many of Trump's fiscal plans are similar to those of President Bush. For instance, Trump hopes to extend significant tax cuts in the Tax Cuts and Jobs Act, increase defense spending, restrict immigration, and introduce higher tariffs.

Combined with the Fed's expected interest rate cuts, Trump's policies could recreate the twin tailwinds that catalyzed the Gold bull market during President Bush's administration - growing fiscal deficits and an accommodative monetary policy.

Potential scenarios and price range.

Gold prices may vary depending on changes in Trump administration policies. State Street believes the following three scenarios could occur:

Base case (50% probability): The potential Trading Range for Gold is between $2600 and $2900 per ounce. In this scenario, US growth continues to exceed expectations, leading inflation Indicators to remain above expectations, with the federal funds rate maintained above the predicted 3.25%-3.50% as of September 2024. In this case, liquidity for Gold ETF will fluctuate throughout the year. Meanwhile, Gold consumer demand in Asia remains stable, and strong central bank purchases create a 'soft bottom' for this Precious Metal's prices.

Bullish scenario (30% chance): Gold prices will fluctuate between $2900 and $3100 per ounce. In this scenario, a slowdown in the growth of the USA is sufficient to cause a weak labor market, leading the Federal Reserve to cut interest rates to 3.25% - 3.5% or lower by the end of 2025. The Gold ETF will experience net inflows for most of the year, with gold consumption demand in Asia increasing as interest rates fall and the dollar weakens. Central banks will continue to purchase gold.

Bearish scenario (20% chance): If the growth in the USA exceeds expectations significantly, and pro-business measures by the Trump administration boost the manufacturing sector, gold will fluctuate between $2200 and $2600 per ounce. Strong growth puts pressure on inflation, causing the Federal Reserve to pause interest rate cuts, and higher interest rates keep the dollar strong, leading foreign capital to flow more into USA assets. Meanwhile, as the dollar remains strong for an extended period, demand in Asia will weaken in the short term. The Gold ETF will experience outflows, but due to continued strong central bank purchases, gold prices are still expected to find bottom support.

Editor/Danial