Gold Market Outlook: 2025 Pause or Prelude to Greater Gains?
Gold prices reached an all-time high of $2788.5 per ounce on October 30, 2024. However, gold has been sold off since the US elections. The uncertainty of Trump's policies in his second term has made the path of the Federal Reserve's interest rate decisions unclear for next year.
Gold is likely to face numerous headwinds in 2025
1. In 2025, geopolitical conflicts may tend to ease. Parties involved in both the Russia-Ukraine conflict and the Israel-Lebanon conflict have shown intentions to negotiate. With the easing of geopolitical tensions, risk assets, including US stocks, generally rose, reducing the appeal of gold as a safe-haven asset.
2. Chinese demand for gold weakens. Gold purchases in China, which had driven the rally in the first quarter of 2024, noticeably slowed down. Non-monetary gold imports dropped from historical highs to multi-year lows within just six months, largely influenced by government signals supporting the economy and a sharp rebound in the stock market, which made gold less attractive as an asset. Gold prices in China shifted from a premium to a discount relative to areas outside China.
3. Trump's US policies may reduce the attractiveness of gold. Trump’s administration might push for federal spending reductions through the Department of Government Efficiency after taking office, and expectations of a deficit reduction put pressure on gold.
4. Bitcoin has a substitution effect. As a digital asset, Bitcoin has diversified investors' interest in gold, a trend that is more evident under the supportive policies of the Trump administration.
What catalysts are necessary to trigger a rise in gold prices?
For gold to reverse its downtrend, a reversal in the above-mentioned conditions would be necessary, with the greatest uncertainty and expectation gap concerning whether Trump’s fiscal policies will lead to higher or lower deficits.
Additionally, even if the existing geopolitical tensions eased after Trump took office, new trade conflicts will emerge. U.S.-Iran relations were challenged during Trump's first term; the situation in Syria has also recently started to worsen. This means that there could still be periodic demand for gold as a safe haven.
1. The fiscal deficit situation remains uncertain
If US domestic tax cuts are implemented first, it could further increase fiscal receipts pressure. With over 70% of fiscal spending being mandatory, further spending cuts could face significant resistance from both the House and the Senate (even though both are controlled by the Republicans).
According to the current Republican Study Committee's FY2025 budget, reducing the "other mandatory spending" and "discretionary spending" from 2.2% and 5.6% of GDP to 2% and 4.3% by 2030 could lower the US deficit to -0.2% of GDP by 2030 and achieve a fiscal surplus in 2031.
However, a recent Goldman Sachs survey of institutional investors showed that 42% of investors expect the reductions to be negligible or very limited, 19% expect cuts between $25 billion and $100 billion, and 32% expect cuts to exceed $100 billion annually, equivalent to 0.3% of GDP. If Trump's fiscal spending cuts are difficult to achieve, it could lead to a further devaluation of the US dollar credit, thereby pushing gold prices up again.
2. Gold mining costs have significantly increased
Research by the World Gold Council shows that the All-in Sustaining Cost (AISC) of gold has risen by 1% quarter-over-quarter, or a more substantial 6% year-over-year, to US$1,388 per ounce. Although gold prices have risen significantly this year, the royalties and taxes that producers must pay are also higher.
A significant component of cash operating costs, labor, continues to be high. In Australia, the Australian Bureau of Statistics noted that the mining sector saw the most substantial quarterly wage increase compared to all other industries it tracks during the second quarter of 2024, with a 1.3% increase quarter-over-quarter, or 4% year-over-year. This trend is not unique to Australia. Newmont also experienced elevated labor costs at its Cero Negro site in Argentina and Ahafo in Ghana.
Moreover, sustaining capital expenditures have climbed during the quarter, reaching an estimated US$301 per ounce, which reflects a 5% increase both quarter-over-quarter and year-over-year. This rise in spending was driven by an uptick in capitalized waste stripping, equipment acquisitions, and technical work.
Overall, rising production costs mean that if gold prices fall significantly, new supply could decrease noticeably.
$Goldman Sachs(GS)$
Despite some selling and profit-taking in the gold market triggered by Trump's victory, Goldman Sachs notes that the factors driving gold prices to record highs have not disappeared. "The structural drivers of this forecast include increased demand from central banks, and a cyclical boost from funds flowing into ETFs as the Federal Reserve cuts interest rates. Additionally, an unprecedented escalation in trade tensions could revive speculative positions in gold."
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Comments
Gold is still a valuable asset worth investing in