Gold prices: Why long-term demand remains bright

Despite Trump’s election win causing short-term volatility, bullion could shine on heightened global tensions, inflation, Fed rate cuts and central bank buying

A jeweller displays a bar of gold in Kuwait City. Bullion is up more than 25 per cent this year. AFP

Gold prices are likely to remain on an upward trajectory although US president-elect Donald Trump’s return to the White House could add volatility in the short term, say analysts.

Gold ticked up on Tuesday but hovered near a one-month low as investors awaited US economic data and comments from Federal Reserve officials for further clarity on the path of interest rates.

Spot gold was trading at $2,597.97 per ounce at 3.37pm UAE time on Tuesday, after hitting its lowest since October 10 on Monday. Bullion hit a record high of $2,790.15 on October 31.

The US dollar held near a four-month high as investors continued to pile into trades seen as benefiting from the incoming Trump administration. A stronger dollar makes bullion less attractive for other currency holders.

The precious metal has declined more than 4 per cent since last week’s US election, as hedge funds unwound bullish wagers and exchange-traded fund (ETF) flows turned less supportive amid a widespread rotation into US equities.

“Mr Trump’s previous policies boosted the dollar, which tends to weigh on gold, yet his unpredictable approach to global affairs could drive the kind of geopolitical uncertainty that prompts safe-haven demand,” says Daniel Jolliffe, investment director at Quilter Cheviot.

“Should his fiscal policies spur inflation, gold might see renewed appeal as an inflation hedge. Ultimately, it’s a fine balance between a stronger dollar and heightened global tensions.”

Gold is considered a hedge against inflation, but higher interest rates reduce the appeal of holding the non-yielding asset.

The precious metal’s price is also bowing to pressure from recent increases in bond yields. Higher yields on bonds mean that assets such as gold, which do not provide interest, become relatively less attractive, as investors can obtain fixed returns from government debt.

Bullion is still up more than 25 per cent this year, supported by the Fed’s easing cycle, central bank purchases and heightened geopolitical and economic risks that drove demand.

“Although gold’s rally has been significant, recent price action might be a sign of a natural and necessary correction from overextended levels. Against this backdrop, the short-term gold forecast has turned modestly bearish,” says Fawad Razaqzada, market analyst at City Index and Forex.com.

“However, the long-term gold forecast remains bullish in light of ongoing rate cuts by central banks.”

Global physically-backed gold ETFs saw inflows for the sixth straight month in October, with year-to-date flows turning positive for the first time this year, the World Gold Council said on November 7. Demand was supported by North American and Asian flows, the council added.

As geopolitical tensions rise and market uncertainties persist, investors have flocked to gold ETFs, which act as vaults of wealth, holding gold on behalf of investors.

Gold-backed ETFs attracted $4.3 billion of inflows in October to lift collective holdings to 3,244 tonnes, the WGC said. After three years of outflows, driven by high interest rates, the past six months have seen a marked reversal.

Ole Hansen, head of commodity strategy at Saxo Bank, believes Mr Trump's return to the White House is likely to reinforce the bullish outlook for gold.

The potential for “Trump 2.0” could drive policy changes – particularly with tariffs and inflationary fiscal policies – that historically increase demand for safe-haven assets like gold, he explains.

“Under Mr Trump’s administration, the possibility of unfunded tax cuts combined with tariffs could rekindle inflation fears, which in turn could slow the pace of rate cuts by the Federal Reserve. This scenario could weigh heavily on the dollar's appeal, creating a favourable environment for gold as investors seek assets that offer protection from both inflation and market volatility,” Mr Hansen says.

“Furthermore, renewed trade tensions may heighten global economic risks, especially with China, bolstering gold as a risk-off asset.”

Naeem Aslam, chief investment officer at Zaye Capital Markets, says a key factor lining up for gold is the Federal Reserve’s cautious dance with rate cuts. If the Fed slows the pace of rate cuts due to inflation risks, this would add to the case for gold in a risk-off environment.

“A dovish Fed could push real yields into negative territory, making gold's zero-yielding nature increasingly attractive,” he says. “On the geopolitical front, any uptick in tensions could spark an even stronger wave of demand, with investors flocking to gold as a sanctuary in volatile times.”

Meanwhile, Quilter Cheviot’s Mr Jolliffe says central banks, particularly in emerging markets, are steadily increasing their reserves, adding to gold demand.

Gold purchases by global central banks, active in 2022-2023, are set to decelerate in 2024 but remain above pre-2022 levels, according to the WGC. This is partly due to the People's Bank of China pausing its 18-month buying streak in May.

Will gold hit $3,000?

A rise to $3,000 for gold “remains ambitious, yet conceivable”, according to Mr Jolliffe.

Reaching $3,000 would likely require a perfect combination of heightened geopolitical tensions, substantial central bank purchases, and aggressive Fed easing

Daniel Jolliffe,
investment director, Quilter Cheviot

Goldman Sachs projects a rise to around $2,700 by early 2025, while JP Morgan anticipates $2,500 in late 2024.

“Reaching $3,000 would likely require a perfect combination of heightened geopolitical tensions, substantial central bank purchases, and aggressive easing from the Federal Reserve. While possible, this level would demand more than typical market drivers to become a reality,” Mr Jolliffe reckons.

Mr Hansen says if inflation risks grow and demand for safe-haven assets intensify amid heightened market uncertainty, gold may edge closer to the $3,000 mark.

However, this outcome is also contingent on the Federal Open Market Committee's rate policy and the strength of the USD, he explains.

Meanwhile, a stronger dollar, driven by heightened interest in US assets and rising Treasury yields, can lower gold prices, Mr Hansen adds.