Gold Monthly View for January 2025

In the calendar year 2024, gold demonstrated remarkable performance, yielding a return of ~ 27%. This upward trend continued into the first month of calendar year 2025, with gold prices surging approximately 6.79% month-on-month. As the new year commenced, gold maintained its upward trajectory buoyed by uncertainty from the Trump regime with respect to economic and geopolitical developments necessitating a need for an effective diversifier, ultimately breaking its all-time high and settling around $2,800 by the end of January. Concurrently, the expected America first approach led to a surging dollar, with rupee depreciating to an all-time low of 86.65. A combination of strong gold prices and weak rupee led to Indian gold prices hitting all-time highs.

Employment data highlighted the addition of approximately 256,000 new jobs in December, supporting Fed’s notion of averting a recession. The Consumer Price Index (CPI) reported for December reflected an acceleration of approximately 2.9% year-on-year, while core inflation remained sticky around 3.2%. Considering sticky inflation and policy uncertainty, the Federal Reserve maintained its position regarding fewer rate cuts for the year and postponed potential rate cut.

Newly elected President Donald Trump commenced his second term on January 20th and promptly overruled approximately 78 decisions made by the Biden Administration within the first few hours. Despite ongoing threats regarding tariffs, no immediate decisions or policies were announced following his resumption of office. However, indications suggested the potential for 25% tariffs on Canada and Mexico, and 10% on China. The uncertainty surrounding tariffs and trade policies has impacted the U.S. Dollar, leading investors to seek gold as an alternative. In the event that higher tariffs and stricter policies are enacted, investors are likely to gravitate towards effective diversifiers in the backdrop of uncertainty, which could enhance the appeal of gold in this context.

The long-standing conflict between Hamas and Israel has finally seen some progress, with a ceasefire treaty signed between the two parties on January 19th. Following this agreement, hostages and prisoners were released, marking a significant development amidst ongoing global uncertainties. However, the impact of this event on gold prices was tempered by concurrent developments and uncertainties in the United States. Meanwhile, the conflict between Russia and Ukraine remains unresolved. President Trump has openly threatened Russia to address the conflicts or face substantial tariffs from the U.S. The forthcoming developments in this matter are expected to be noteworthy, as they may lead to significant implications.

The U.S. pending home sales index declined by 5.5% in December, as reported by the National Association of Realtors (NAR). This followed a revised increase of 1.9% in November, which was initially reported as 2.2%. The December figure was significantly worse than anticipated, with economists forecasting a flat reading. Transactions decreased month-on-month across all four U.S. regions, with the West experiencing the most pronounced decline. In the minutes following the housing report, spot gold continued to rise, building on an earlier spike triggered by disappointing Q4 GDP figures.

Outlook

As we move into February 2025, several key factors are poised to influence market dynamics, particularly in the gold sector and broader economic landscape. The recent ceasefire between Hamas and Israel, while a positive development, may have a muted impact on gold prices due to the prevailing uncertainties in the U.S. economy, including the implications of the Federal Reserve's monetary policy and ongoing geopolitical tensions. In conclusion, February 2025 is expected to be characterized by continued volatility and uncertainty in both the geopolitical and economic arenas. As investors navigate these challenges, gold is likely to maintain its status as a favoured asset, with prices potentially benefiting from the prevailing market conditions. The interplay of these factors will be crucial in shaping investment strategies and market sentiment in the coming weeks.

As we look forward, unveiling of initial Trump policies may bring cheer to the US economy and the dollar but may not last long as it economic underpinnings will lead to execution challenges. Trump policies so far have been transactional as there have been some relaxation towards Mexico and Canada as they pop a bargaining candy and may land a compromise to provide some favour to Trump to claim a symbolic victory. Whereas China, with its accumulated gold holdings, has been standing tall to US threats and retaliating with counter measures.

This could either be deflationary in case he is able to extract good deals for America through his tariff threats or could be very inflationary if it ends up driving increased manufacturing / higher tariffs imports in the US. However, in both scenarios the underlying deficits with trading partners are likely to reduce. This in turn means there would be reduced sharing of US growth with other economies and thereby an incentive to move away from the US. We have seen countries try to diversify away from the dollar from a trade and reserves perspective and such weaponizing policies could exacerbate the trend.

The current surge in gold is largely on back of tariffs, economic and geopolitical uncertainty and may remain well bid in the short term on account of uncertainties. However, if Trump posturing subsides or does not land an economic upheveal, the surge in gold prices may subside. Its difficult to predict Trumps policies and its impact with lot of moving parts, the gold markets may largely remain well supported albeit with heightened volatility going forward.

Source: WGC, RBI

Above article is authored by Quantum.

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