Gold back in fashion with double-digit YTD gains

With all the excitement in the equities and crypto markets of late, precious metals have been somewhat out of the spotlight for some time now. But the quintessential inflation hedge gold has been doing what it does best: gradually grinding out the gains incrementally in the background without drawing too much attention to itself. However, the yellow metal sprang to the front of the investment news cycle this week after gaining more than 10% since the start of the new year to reach a new all-time high above $2,800 per Troy ounce. Now, this might not seem like much compared to digital asset gains, but for gold, this would typically be considered a good annual performance. When we consider that, in just the space of a year, the metal is up nearly 40%, the incongruence becomes even more apparent. 

Yet amid geopolitical instability, multi-year high interest rates, and rapidly rising prices, we're not living in normal times by any means. But what else is causing gold's seemingly unstoppable ascent, and what will be the major factors that could lead to a continuation or not of the current bull cycle?

Point 1: Cash is king?

In response to the double-digit inflation of 2022, the Fed and other central banks raised interest rates sharply, reaching over 5% in the US and UK. This made bank savings and other fixed-income investments viable vehicles for preserving wealth and led to a stagnation in the gold market. However, as the Federal Reserve began cutting interest rates in early 2024, gold's fortunes turned. However, the rate cuts dried up in the second half of the year, with many more seemingly already priced into gold and other markets. If the funds rate remains elevated above 4% for much of 2025, this could buoy cash-based investments to the detriment of the yellow metal.

This is most apparent in the gains in both the US 10-year Treasury bond yield, which rose three basis points to reach 4.531% this past week, and real yields, which similarly increased to 2.079%. The New York Fed Survey of Consumers tells us that inflation expectations remain steady and rational despite consumers' estimates of inflation at 3% in the near term. Nevertheless, expectations for the next five years jumped from 2.7% to 3%, which would suggest that any rate cutting by the Fed would need to be measured. Indeed, money market fed funds rate futures are pricing in just 38.5 basis points of easing by the Federal Reserve in 2025, which would still leave rates at around 4%. With gold already at all-time highs and cash investments yielding solid returns, 2025 could see more restrained growth.

Point 2: Uncertain times

It's one thing to look at macroeconomic data in isolation, but we have to consider the full picture against the backdrop of a world in turmoil. The geopolitical situation in Europe and the Middle East is still fraught with risk, and the hotting up of the Sino-US trade war this month is yet another source of uncertainty that will likely play right into gold's hands. In fact, XAU/USD's testing of $2,900 this week coincides exactly with President Donald Trump's announcement of new 25% tariffs on a raft of Chinese goods, including raw materials like steel and aluminium. The Chinese have responded with 10% and 15% border levies on US coal and LNG imports, which shows the CCP's appetite for a protracted conflict if necessary. Trump is far from content fighting with just the world's second-biggest economy. He has threatened and implemented tariffs against a wide range of other nations, including Brazil and Canada, major producers of gold.

Meanwhile, the current state of the US labour market also gives some cause for concern. In its report last Thursday (6/02), the Department of Labour noted a rise in initial jobless claims to 219,000 for the week ending 1 February. This belies a growing weakness in an already precarious labour market, which in turn makes the possibility of Federal Reserve rate cuts all the more likely. The combination of all of these factors bodes well for gold on the whole, but much will still depend on how the Fed responds to the impact of each of them.

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