Gold rallied to five-week highs after powering through the $2700 an ounce level ahead of a much-awaited Federal Reserve meeting next week. The rally came amid growing expectations that the central bank will cut interest rates as part of the monetary easing cycle. While the precious metal has pulled back from recent highs, the upward momentum remains intact.
Gold Bounce Back
According to market estimates, there is a 96% chance that the FED will cut by 25 basis points at its next meeting. The heightened expectation is one factor that has fuelled dollar weakness, much to the benefit of higher gold prices. Gold consistently outperforms in a low interest rate environment. Analysts at Wisdom Tree expect gold prices to reach record highs of $3,000 an ounce in 2025 amid accommodating monetary policy.
Likewise, gold should benefit from soaring geopolitical tensions. The metal is traditionally reputed as a safe haven that outperforms in times of uncertainty. The unending escalations in the Middle East, with Israel attacking Syria and Gaza, are one factor that should continue to fuel gold demand heading into the New Year.
Market participants are also keeping an eye on the situation in Syria following President Bashar al-Assad’s escape as rebel forces took control of the capital, Damascus. US airstrikes have targeted numerous Islamic State positions in the central region of the country, while President Joe Biden warned that Assad’s exit might trigger a revival of Islamic extremism.
China Gold Buying
Likewise, Gold prices are benefiting from a renewed buying spree from China. After a six-month hiatus, the Chinese central bank is back in the market as it looks to bolster its foreign reserve around the precious metal. The Chinese central bank says it bought 160,000 fine troy ounces in November, ending a six-month pause.
The renewal of purchasing indicates that the PBOC remains eager to broaden its reserves and protect against currency devaluation despite gold being close to all-time high prices. However, the quantity acquired, approximately 5 tons, was relatively modest compared to the monthly increases seen earlier in the year. China resuming gold buying is one factor expected to trigger increased buying from other central banks. The return of Chinese purchases could bolster investor interest within the nation.
Despite a recent lull, China’s gold-buying frenzy, which started in 2022, still needs to be done. 2023 was a particularly massive year for the global gold splurge spearheaded by the People’s Bank of China (PBoC), as China’s central bank increased its gold purchases by a staggering 30%.
The World Gold Council (WGC) reports that last year, the PBoC bought more gold than all other central banks combined, with China’s central banks purchasing 1,037 tones. With net purchases of 290 tons in the first quarter (Q1) of 2024—the fourth-strongest quarter of purchases since the buying streak started in 2022—China once again led the way, demonstrating that this buying intensity persisted well into 2024.
Strong buying activity from central banks has significantly contributed to the impressive surge in gold prices this year, alongside relaxed monetary policies and ongoing geopolitical conflicts. The Fed’s shift to monetary easing and rising demand for safe-haven assets due to the heightened tensions in the Middle East and Ukraine should support higher gold prices heading into 2025.
