Gold remains on the back foot after slipping to one-month lows on the US Federal Reserve, hinting at a possible slowdown in interest rate cuts. Spot gold initially plunged to the $2589 level as the dollar and bond yields bounced on expectation of higher interest rates than initially feared.
FED Setback
A period of slower rate cuts favours dollar strength that hurts gold allure in the markets. Likewise, higher interest rates tend to favour yielding assets such as bonds and treasuries at gold expense. US central bank policymakers have indicated they want to see progress in bringing inflation down to plot future rate cuts.
Futures on federal funds rate are already pricing that the FED will leave the benchmark rate unchanged at its next meeting next month. The Fed’s slowing interest rate cut will likely pile pressure on gold, which has struggled to power and find support above the $2700 level. Gold plunging below the $2600 level is expected to worry more bulls that had placed bets on the precious metal powering to the $3,000 level.
Despite the recent pullback, several factors could push gold prices higher, even with strengthening the US dollar. Heightened geopolitical tensions and increased central bank purchases are other factors that can significantly impact old prices heading into 2025.
Central Bank Purchases
Strong central bank gold buying has been the catalyst behind gold rallying by more than 28% in 2024. India, Turkey, China, and Poland’s central banks have been buying gold even when prices have increased as they seek to strengthen their foreign reserves.
This rise is consistent with a larger pattern over the previous five years, when institutions’ net purchases of gold, primarily central banks, have increased dramatically. A number of EMDE central banks’ reserve management plans and worries about geopolitical risks are partially to blame for the increase. Furthermore, a rebound in exchange-traded fund demand for gold contributed to price increases in 2024Q3.
Following record purchases in November, India’s gold imports are expected to see a significant slowdown in December. The lack of a significant festival and buyers delaying purchases due to rising prices could hurt gold prices. A surge in global prices that reached a record high in October may be capped by lower imports from India, the second-largest consumer of the precious metal worldwide.
Geopolitical Headwinds
Even though domestic factors have largely influenced geopolitical events in 2024, such as South Korea’s martial law, there is a chance that strong international forces will increase political risks in the coming year. For instance, global growth may suffer, global budget deficits may increase, and inflation may persist if Donald Trump’s trade policies become disruptive. This might lead to additional gold purchases.
According to some, President Trump’s economic policies may cause inflation. The nonpartisan Tax Foundation says his proposed import tariffs are a distorting method of raising money. They believe that because import tariffs encourage retaliation from other countries, they will negate two-thirds of the long-term economic gains from Trump’s tax cuts. The Tax Foundation estimates that a new trade war would reduce GDP by 1.7%. According to the Bloomberg Contributor composite CPI forecast, the annual CPI is expected to drop to 2.4% in 2025 and increase marginally to 2.6% in 2026. Therefore, the CPI will not be anticipated to return to the Fed’s 2% target rate in the upcoming year. Weak growth and high inflation are ideal conditions for gold bulls that could trigger renewed gold demand, making prices higher.
