【MACRO Insight】Global monetary policy, geopolitics and demand dynamics - three driving forces that a

2024 is undoubtedly a spectacular year for the gold market. Heightened geopolitical tensions, growing demand for gold from Asian consumers, and strong central bank purchases of the precious metal pushed gold prices to 41 new closing records in the first ten months, reaching an all-time high of $2,790 per ounce at the end of October. Although gold's momentum stalled at the end of last year as Trump won the US election, driving up risk assets and the dollar, State Street believes that gold prices still have room to rise in 2025. The bank expects gold prices to fluctuate between $2,600 and $2,900 per ounce in 2025, with the potential to even rise to $3,100 per ounce.

For many analysts, the Federal Reserve's monetary policy remains the dominant force in global financial markets, as the Fed struggles to find a balance between continued inflationary pressures and supporting economic activity. In the final weeks of 2024, the Fed's monetary policy expectations changed dramatically.

We believe that investors should pay more attention to themes rather than broad asset classes because superpowers are reshaping the entire economy." Analysts said, "We believe that the United States still stands out among other developed markets, thanks to stronger growth and the ability to better utilize superpowers. We have increased our overweight ratio in U.S. stocks and believe that the artificial intelligence theme will expand further." However, BlackRock still has an underweight attitude towards U.S. bonds and expects bond yields to continue to rise in 2025 due to the Federal Reserve's inability to take aggressive interest rate cuts.

Before Trump took office, he threatened to impose trade tariffs on almost every major economy in the world. While tariffs may help boost domestic manufacturing and support the dollar, these policies will come with costs and could exacerbate the ongoing threat of inflation. In this environment, fixed income analysts at TD Securities are slightly pessimistic about the U.S. and global economies and more dovish on U.S. interest rates, predicting that the Federal Reserve will cut interest rates four times by 2025, with the federal funds rate falling to 3.50% by the end of the year.

State Street's 2024 study of gold ETFs shows that high-net-worth investors have nearly doubled their gold allocations over the past year, viewing it as a safe haven asset. State Street expects this trend to continue even as capital markets take a risk-on stance in 2025, with gold's price support factors and its status as a safe haven continuing to boost its appeal as a core portfolio asset. Will a stronger dollar hurt gold？ Gold is a dollar-denominated asset, so a strong dollar can sometimes be a headwind. But over the past few years, that pattern has been broken by unprecedented central bank buying.

The pace of these purchases began to accelerate when international trade relations deteriorated during Trump‘s first term. This laid the foundation for more countries to see foreign exchange diversification as a national security issue. In 2022, after the United States “weaponized” the dollar through financial sanctions on Russia, central banks’ gold purchases were once again “accelerated”. Now, developed country central banks have also become open buyers of gold.

Another long-term driver of gold demand is the Asia-Pacific region. Over the past three decades, the region‘s huge economic growth has boosted per capita incomes and spurred investment. From 1990 to 2023, Asia-Pacific’s GDP per capita has more than doubled, and its contribution to global GDP growth has increased from about a quarter to more than two-thirds. The number of gold funds in India and China has grown rapidly, sparking investor enthusiasm.

U.S. monetary and fiscal policy in 2025 could also influence the direction of gold. Until the exact size of tariffs and tax policies becomes clear, their true impact will not be known. The Fed predicts further rate cuts in 2025, but the exact number depends on the strength of the economy and the extent to which fiscal policy increases inflationary pressures and the federal deficit. Fiscal deficits driven by government borrowing and spending produce a set of economic conditions that favor gold.

Gold prices could vary depending on changes in the Trump administration's policies. State Street sees three possible scenarios: Base case (50% probability): Gold's potential trading range is between $2,600 and $2,900 an ounce. Bullish case (30% probability): Gold prices will fluctuate between $2,900 and $3,100 an ounce. Bearish case (20% probability): If U.S. growth far exceeds expectations and the Trump administration's pro-business measures boost the manufacturing sector, gold will fluctuate between $2,200 and $2,600 an ounce.