Everything you need to know about gold in 2025: New highs or major downturn?

1. Low or negative real interest rates

All things being equal (i.e., with respect to the other factors listed here) the level of real interest rates is the most critical factor in determining the gold price. The real rate is the nominal interest rate minus inflation. Markets generally use a benchmark long term bond yield as a proxy for the nominal interest rate, for example, the yield on the US 10-Year Treasury Bond.

Gold bullion doesn’t have a yield, more so, one probably will incur holding costs (e.g. security and insurance) when holding large amounts of it. This means that when real interest rates fall (i.e., due to lower nominal rates, a higher inflation rate, or a combination of both), the opportunity cost of holding non-yielding assets like gold falls.

This means there are fewer financial impediments to owning gold and taking advantage of its defensive characteristics, or other favourable demand-supply fundamentals.

2. High inflation concerns

This item follows on from above, but additionally given there is a general perception gold is a stable store of value, it means gold is seen by many as a hedge against inflation. Inflation erodes the purchasing power of regular (“fiat”) currencies, so when inflation fears rise, investors often flock to gold to preserve their purchasing power.

3. Weak US dollar

Gold is primarily priced in US dollars in financial markets. This means a weaker US dollar makes gold cheaper for overseas buyers, typically boosting its demand and helping push prices upward.

4. Geopolitical tensions and market volatility

For hundreds of years gold has been viewed as a safe-haven asset in times of heightened geopolitical risks or episodes of extreme stock market volatility. Any flight to safety in financial markets, or “risk aversion” as it is usually referred to by economists, tends to lift prices.

5. Central bank demand

Most central banks hold gold as part of their foreign exchange reserves (e.g., China holds around 5.5% of its US$3.2 trillion total foreign reserves in gold). There is a growing trend for global central banks to diversify away from the US dollar – long considered the global reserve currency. This growing “de-dollarisation” trend could provide an additional boost to gold prices.

Factors typically associated with gold price weakness

1. Rising real interest rates

The opposite of 1, above. As central banks raise interest rates and or as global inflation falls, the opportunity cost of owning gold increases.

Consider that major government bonds, for example US bonds, are considered by markets to be risk-free. Gold is widely accepted to be a safe haven asset, but it is not considered to be risk-free. This means as the rate that can be earned on risk free bonds increases, the costs associated with holding gold become increasingly punitive.

2. Stable or low inflation

This item follows on from above, but also, low rates of inflation reduce the opportunity cost of owning fiat currency. Investors are therefore more likely to hold fiat currency and use it to pursue higher-yielding opportunities in bonds, stocks, or other risk assets.

3. Strong US dollar

The opposite of 3, above. Gold tends to move inversely to the US dollar. When the US dollar strengthens significantly, gold becomes more expensive for foreign buyers, often reducing its global demand.

4. Positive economic outlook

During periods of robust economic growth, investors become risk seeking, therefore buying growth-oriented stocks and corporate bonds. Gold may see its relative safe-haven allure fade, causing investors to convert their gold into fiat to allow them to chase higher yielding / higher growth assets.

5. Reduced uncertainty or geopolitical calm

Gold thrives on uncertainty. When markets are calm and geopolitical tensions are low, gold’s safe-haven appeal wanes, generally leading the gold price to soften.

The current environment for gold

Let’s review the above five positive / negative factors for gold in light of the current macroeconomic and geopolitical environment.

1. Real interest rates - Positive or negative?

Yields on most benchmark long term bonds are currently rising, offering investors nearly 5% in some cases of risk-free yield over the next 10-years. In particular, note the yield on the US 10-Year Treasury Bond has increased from around 3.6% in September, to around 4.8%.

2. Inflation – Positive or negative?

This item follows on from above, inflation expectations have been rising steadily since September and appear to be in a solid uptrend. I suggest we call a POSITIVE here.

3. Weak US dollar – Positive or negative?

A picture tells a thousand words (see chart below). The US dollar is rocketing on a growing realisation the US economy won’t experience a hard post-COVID pandemic landing, and further, that an uptick in expansionary fiscal policy from the incoming Trump administration may spur even stronger growth down the track. I suggest we call a NEGATIVE here.