2 reasons A$ gold will continue to thrive for Australian investors

Co-authored by Marissa Salim and Ray Jia (Research Head, China)

Summary

• Gold, in Australian dollars (AUD), continues its momentum in early 2025, outperforming other assets
• We believe the combination of robust investment demand together with risks on various fronts may provide further support for gold,
• Amid potential local currency pressure and asset volatilities, gold could become a key strategic asset for Australian portfolios

Gold off to a strong start in 2025

Eight weeks into 2025, gold, in AUD, is leading the pack with the highest YTD return among key asset classes in Australia, driven by a combination of macroeconomic and market factors (Chart 1). Amid signs of slowing economic growth, lower US yields and a weaker dollar have reduced the opportunity cost of holding gold, making gold more attractive to investors.

Uncertainties surrounding global trade policy have also contributed to investor appetite for gold as a hedge against potential volatility. Meanwhile, the record-shattering gold price momentum itself has reinforced the bullish market sentiment, further supporting gold prices.

Chart 1: Gold continues to lead the charge in 2025

Asset performances during 2025 so far*

Is there a case for gold in AUD to continue to thrive?

This year is likely to be supportive for gold. As our 2025 Gold Outlook noted, upside potential for gold could come from continued central bank gold purchases and possible spikes in geopolitical risks – mainly on the trade and economic policy fronts. Meanwhile, volatility in equities and bonds could provide additional boosts to investment demand for gold. And as uncertainty in the US bond market stays elevated, we believe the impact from yield changes may be less pronounced on gold, as our recent analysis demonstrates.

Furthermore, we believe potential weakness in the Australian dollar may provide an additional boost to gold in local currency terms. Such currency weakness may stem from two main fronts:

1. Changes in monetary policy expectations

In its latest move, the Reserve Bank of Australia (RBA) delivered its first rate cut since November 2020 as inflation has showed signs of cooling and the global macroeconomic outlook remains muddy. The market is currently pricing in further cuts of over 80bps cuts for 2025, much higher than the previous expectation (Chart 2).(1) Inflation has continued to moderate and is expected to reach target level some time in 2026(2). And the RBA also noted that financial conditions remained restrictive and weighed on private consumption while the global macroeconomic outlook continued to be uncertain. Meanwhile, the US Fed has been cautious in cutting rates amid stubborn inflation levels, potentially widening the spread differential between the US and Australia.(3)

Chart 2: RBA rate expectations for 2025 

Policy rate expectations reflected in overnight index swaps (OIS) futures*

2. Potential growth risk

Restrictive financial conditions, declining real income and cooling momentum in the housing sector all weighed on Australian growth in 2024. Even if markets are right about cuts, the absolute level of rates and their lagged impacts could continue to chip away at the economy’s resilience. Uncertainty surrounding Chinese economic development – further deepened by current and potential future US tariffs - may also pose challenges for Australia’s economy (4). As historical data shows, sluggish growth usually leads to a weakening local currency.

Other risks such as global trade policy uncertainties and geopolitical risks may also induce volatility in local assets, creating stress for Australian portfolios. This has been a key area of concern among APAC investors. Gold’s positive outlook and its ability to cushion market risks, we believe make it a key asset to local portfolios (Chart 3).

Chart 3: Gold provides diversification benefits investors need: protecting portfolios in down market while boosting return in equity bull runs 

Conditional correlation between gold, in AUD, and ASX300*

In conclusion, gold could become a key asset in Australian investors’ portfolios. Although the macro environment this year may bring some headwinds, the global geopolitical landscape and risks stemming from financial markets are certain to attract attention from official institutions and investors. Meanwhile, the potential risk of AUD weakness could make gold more attractive in local investors’ portfolios. And over the longer term, we anticipate that gold will deliver a stable return in line with global nominal GDP growth.