Gold (XAU) prices rose almost 30% over the course of the last year, scoring several new record highs along the way. But, since its final peak in September, the price of the yellow metal has struggled a bit. Now, analysts seem to believe that gold is set for another year of strong performance.
Historically, the price of gold has risen while interest rates decline. Since the main theme of last year was when major central banks would start to ease, the improvement in the price of gold was to be expected. However, analysts point to the last few months of trading, when interest rates started to rise again. This was particularly noticeable in the US, which is important, because gold is priced in dollars. The trend should have reversed, but the notable resilience of gold during that period has given some analysts hope that a strong surge is coming.
What’s Driving the Price
Gold (XAU) has been one of the best performing assets over the last year. That could be a matter of concern, as usually the yellow metal outperforms in periods of economic or geopolitical crisis. But, so far, investors seem sanguine about the economic outlook, which means geopolitics is likely a bigger factor. Which adds some additional unpredictability, because governments respond to internal and political issues as opposed to more rational (and therefore theoretically more predictable) market moves.
The war in Ukraine and tensions in the Middle East have been catalysts for short-term bursts in gold buying. But long term buying by central banks, led by China’s PBOC, is seen as a major driver, as many large economies look to reduce their exposure to the US dollar. Last year, 23% of gold being bought was by central banks, up from 10% just three years prior.
What Could Shake Things Up
The arrival of Donald Trump to the White House could change the dynamic, but not the trend, according to analysts who forecast gold hitting as high as $2,900 by the end of the year. They argue that while Trump seeks to end the current conflicts in Ukraine and the Middle East, tariffs and his mercurial trade policy could keep emerging markets buying Gold (XAU) for the foreseeable future.
Meanwhile, the major driver of last year’s gold surge is expected to stay in place: Central bank easing, particularly by the Fed. Admittedly, the pace of the easing will moderate from the 100 bps per quarter seen over the last three months. Markets are still pricing in at least 50 bps of easing by the Fed over the course of the next year. With yields expected to decline, the price of gold would presumably retain some of its headwinds.
More Upside Indications
However, the upward trend could be punctuated with increased volatility from its safe haven side. Strong economic performance and an uncertain timetable for implementing tariffs and other geopolitical measures could cause gold to move around more than last year.
Finally, while economists and analysts have mostly ruled out a recession for this year, there is still a risk of a significant market downturn. Stock markets still have uncommonly high valuations which often signal an impending correction. That could also give gold an unexpected boost.