Will gold continue to shine in 2025?

Gold as an asset class is commonly used as an insurance policy for when concerned investors sell their shares and a look for a ‘safe haven’ to store their wealth. 

For the past couple of years it has performed in the face of higher interest rates and a strong US dollar, which typically support a weaker gold price. At the end of 2024 there was some pullback in the gold price primarily as the uncertainty of a potentially disputed US election faded following Donald Trump’s clear and decisive win. However, gold has since recovered, but can it continue to perform in 2025?

When the US dollar performs strongly, which it has done for the last few years, it means gold becomes more expensive, as it is priced in US dollars. This should, theoretically at least, lead to demand for, and therefore the price of gold to fall.

Trump’s tax cuts could drive the US dollar higher in the near term. But over the long term, we expect the US dollar to depreciate from its current levels, as it is expensive relative to other currencies. This would make gold more attractive as it becomes cheaper, which could result in further demand for the glittery asset. 

Gold doesn’t produce anything and it doesn’t yield an income. Holding gold in a portfolio means there is an opportunity cost as you give up an investment in another asset. When interest rates are low the cost of that decision is not particularly expensive. 

There is also a long term link between inflation and gold. Historically gold provides some protection against rising prices, which is likely to be one reason behind its recent performance and popularity, even with interest rates having risen. While inflation has already come down from its peak, it could remain elevated and support the gold price.

A strong US dollar and higher interest rates haven't stopped gold's value from rising. This is because demand from central banks and private individuals has driven the gold price as investors have sought alternatives to the US dollar. This was a consequence of Russia’s invasion of Ukraine and the financial sanctions placed on Russia by the West, particularly its US dollar denominated assets, which were frozen.

Meanwhile, countries supportive of Russia, such as China, may also have concerns of being sanctioned so their central banks bought gold as a protective measure and as a way to reduce exposure to the US dollar.

Trump’s return to the White House and the use of trade tariffs, ‘America First’ policies and possible use of sanctions could boost the momentum of trading in gold as more governments shift out of US Treasuries and the US dollar.

Asian investors have a long history of buying and owning gold. The alternatives currently look less attractive – for instance China’s property and stock market have both been depressed for a while.  

For Indian investors, meanwhile, the low interest rates and lower import taxes on gold, cut from 15% to 6% in July¹, may drive them to invest in more gold. If these trends continue, we are likely to see further demand for gold in 2025. 

Gold plays a useful role in portfolios: it provides an element of protection against more volatile stock markets and offers a good alternative to bonds. 

We have been positive on gold for a while as central banks, such as in China, look to diversify away from the US dollar. We remain positive longer term for gold as a beneficiary of any weakness in the US dollar and protection against further geopolitical uncertainty. However, it continues to only represent a small proportion in portfolios, typically around 5%. 

As with all investments, please remember that investing in gold carries risk and you may get back less than you initially invested.

1. Reuters.com, India slashes import tax on gold, silver to tackle smuggling, July 2024