Gold can continue to rise above levels of USD 3,000 per oz this year, as supported by several factors

Central bank demand

Central bank purchases of physical gold have more than doubled since 2022. Western authorities’ decision to sanction the reserve assets of the Russian central bank crossed the Rubicon, implying that in the future, any country with a significant political disagreement with the West is running an implicit asset confiscation risk.

Consequently, central banks around the world have allocated an increasing share of their reserve assets to the yellow metal, and we think that this trend will continue in 2025. Even if the war in Ukraine moves towards a negotiated settlement, the wider geopolitical outlook should remain constrained, meaning that gold will benefit from a strong underlying bid from central banks around the world. The World Gold Council believes that central bank gold purchases have added around 15% to pricing.

We note that central bank holdings of gold remain at comparatively low levels of their FX reserves, and a 1% increase in gold’s share in central bank FX reserves would come to more than 1,000 tonnes; this gives an idea of the overall demand outlook from this sector alone.

Rising consumer demand

Additionally, gold may benefit from the rise in long-end bond yields. Normally, rising yields tend to depress gold prices; however, there has been a significant correlation breakdown between gold and real rate expectations since 2022. Causality is key in this respect, as the rise in long-end yields also reflects a return of positive term premia in bond markets. Term premia are the extra compensation that bond investors demand to compensate for higher levels of risk (e.g. inflation or default). With governments engaging in significant fiscal deficit spending, this is likely to result in higher debt-to-GDP ratios, and gold may turn out to be a superb hedge in such a situation.

The ongoing robustness of Asian consumer demand is set to continue in 2025. India’s decision to reduce import taxes on gold and silver has been a boon for demand. Chinese retail demand will remain solid, and local gold futures are trading at a premium to global benchmarks, which likely implies that local consumers are using gold as a hedge on their domestic currency savings (CNY). Chinese retail demand will remain solid this year, with consumers increasingly using gold as a preferential savings and investment vehicle.

To round off the picture, Western retail investors have started to increase their investments in gold-focussed exchange traded funds (ETFs). The prospect of lower interest rates in many of the major economies reduces the opportunity cost of holding gold, and consequently Western retail demand should push gold towards higher levels.

Correlation breakdown

The above-mentioned correlation breakdown is highly important for the longer-term gold outlook. Normally, higher nominal bond yields would be an onerous development for gold. However, we can see that it has traded robustly, despite significantly higher yields in both developed and emerging market economies. The implication of this is that gold is now trading for reasons other than the wider monetary policy outlook, and the correlation breakdown makes gold more attractive to institutional investors who are looking for uncorrelated return streams. It also implies that we may even see gold materially outperforming if central banks move to cut rates in the coming quarters.

Institutional investors have increased their long gold positioning, and we note that both CFTC (Commodity Futures Trading Commission) and COMEX (Commodity Exchange) futures data show that investors have decent long gold exposures; however, it is not at all-time high levels, giving scope for further institutional allocations in the coming months.

We note that nominal GDP growth in most of the developed markets is materially higher than in the pre-pandemic period. Rising nominal GDP growth is a function of deficit spending, and of generally higher inflationary pressures. Such an environment requires real assets as an anchor of overall portfolio performance, and this is likely to result in increasing allocations to gold by both retail and institutional investors.

Trade and tariff tensions

The prospect of further tariff increases under the new Trump administration is likely to spur gold towards even higher levels. Higher tariffs will result in modest inflation increases, which over the longer term is constructive for gold prices. There are also important second-order effects to consider. We note that the currencies of tariffed economies have weakened by around 4–8% since President Trump was elected in November. The prospect of a new universal or global tariff system implies that we may see competitive devaluation pressures emerging in both G10 and emerging market currencies. Such an environment is typically conducive to gold price increases, and we think that this time will be no different. The underlying causality this time around means that gold is likely to react quickly, meaning that we can easily envisage a situation of higher prices in the short term.

Geopolitical tensions

The rise in geopolitical tensions following the outbreak of the Russia-Ukraine war will be the norm over the coming years. US-China rivalry is most evident in the sectors of trade and technology, and we think that it will become increasingly evident in other spheres over the coming years. Despite President Trump’s pledge to end wars, we believe that the US and China will have an increasingly fraught relationship. This means that gold will continue to offer non-linear appreciation potential if tensions continue to boil over.

Investors should not mistake any ceasefire or negotiation in the Ukraine war as the beginning of a détente. We believe that we have entered a fundamentally challenged security regime in Europe, and, in the context of higher inflation, such an environment is highly conducive to continued gold rises.

Changing monetary regimes

We note that the USD exchange rate is trading at multi-decade highs. This is true in both trade-weighted and real effective exchange rate terms. President Trump’s administration believes that the USD is grossly overvalued, and this is indeed consistent with most fundamental valuation models. The scale of the USD’s overvaluation means that US trade deficits are wider than they should otherwise be, and the US could engineer a correction in this set-up either by undertaking a unilateral intervention (which we think is unlikely) or through a coordinated approach similar to the Plaza Accord of the mid-1980s.

Such an accord would see the currencies of the US’s main trading partners appreciate against the USD. We think that such an accord is unlikely in the short term, because the Chinese and European authorities will be reluctant to have stronger exchange rates.

In the past, when the USD has approached multi-decade-high valuations, this has been a precursor towards gold outperformance in the following years. The shift towards a new monetary order, or even a simple reordering of currency valuations is conducive to gold outperformance. We believe that gold is around halfway through a secular bull market, which began in 2017, and history shows that gold bull markets typically show returns of between 200–400%. This gives ample scope for further outperformance in the coming years, and again, it is one of the many reasons that we believe that gold has further room to run.