Thu, 03/20/2025 - 13:14
Often dismissed as old-fashioned and slow-moving, gold typically flies under the radar of many modern investors and traders, particularly amid the hype surrounding crypto. However, recent price action would suggest that the yellow metal is anything but a thing of the past. After five years of incremental gains, gold finally broke the fated $3,000 mark this month and currently sits at $3,044.05, more than doubling its early 2020 price. The classic store of wealth has proven its mettle over a period of global upheaval and vindicated itself as a vital part of any portfolio in the face of its army of detractors.
The factors behind the precious metal's resounding rise are multiple – from unceasing uncertainty beginning with COVID through to rampant inflation in the post-pandemic era and then worsening geopolitical instability from 2022 to today. As the quintessential hedge, gold has consistently weathered the storm, and this new all-time high is an historic milestone. Now, with destabilising tariffs threatening a trade war between superpowers, plus expectations of lower interest rates around the world, a multitude of new factors could push gold higher in 2025.
The Trump factor
In stark contrast to many other asset classes, precious metals love uncertainty, and today's world is about as far from certain as it's ever been. Conflicts remain unsettled in both Europe and the Middle East, with the threat of escalation always lurking. And if that wasn't enough, President Trump seems to be itching for a trade war with just about everyone. Following his announcement of a flat 25% duty on steel and aluminium that began in February, there are a number of reciprocal and sectoral tariffs due to take effect on 2 April. The main targets of his economic sanctions have been China and near neighbours, Mexico and Canada.
Naturally, a full-blown trade war between the world's two biggest economies, the US and China, would be devastating for risk assets but a sure boon for gold. The CCP's tit-for-tat tariffs on US coal and LNG suggest that the Chinese could be prepared to go toe to toe with The Donald. With natural inflation still sticky, the effect of artificially inflated prices for major industrial commodities can only mean more price growth for gold, the historic go-to for hedging against inflation.
However, it remains to be seen to what extent Trump is serious about a protracted exchange of tariffs. It wouldn't be the first time such a threat was used just to negotiate better trading terms for the US. The potential for a negotiated end to both the big global conflicts at the moment — a Republican campaign pledge — would also take some of the wind out of gold's sails.
Mapping the macroeconomics
As much as world events will surely shape the outlook for gold throughout the rest of the year and beyond, there are also macroeconomic elements that cannot be overlooked. Despite inflation sticking closer to 3% than to the 2% target set by central banks, there is a lot of pressure on the Federal Reserve, ECB and BoE to deliver on the multiple rate cuts promised last year. Many borrowers who took out mortgages pre-pandemic are struggling to cope in an environment of over-5% real rates, and something has to give.
On Wednesday, 19 March, the US Federal Reserve held its funds rate steady at 4.25-4.5%, though the regulator did state it plans to make good on its pledge of at least two rate cuts this year. According to the CME's FedWatch tool, traders see nearly a 66% chance of a rate reduction by June, which would certainly work against the US dollar, thus strengthening gold. Another buoying factor for gold that appears to be anything but over is the weakening of the US dollar we've observed in recent months. The greenback has lost an average of 5% against its major competitors, the euro and sterling, which by itself results in a higher value for dollar-denominated gold. The US 10-year Treasury bond yield has also dropped more than 10% from its January high of 4.8%, though it still remains relatively elevated at 4.239%. However, when the Fed rate cuts come, it will also inevitably fall, making gold a much more attractive option and thus boosting demand.
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