The much-followed price of gold climbed to new highs in 2024 but the pace of interest rate cuts and political change, particularly the new Trump presidency in the US, could take some of the shine off the yellow metal.
A drive to invest in gold sent the commodity's price to a record high of $2,788 in 2024 and some experts are predicting that it could soon break the $3,000 barrier.
It is currently at $2,633.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Lower US interest rates were a catalyst for higher gold prices through the autumn of 2024, and with November’s US inflation data seeming reasonably supportive of further rate cuts in the new year, further gains could be on the way.
Central banks have also been buying up gold, especially in countries like Russia and China, which has helped inflate the price. Meanwhile, the metal is increasingly being used in other industries like nanotechnology and artificial intelligence (AI), as well as in cancer therapy and to fight malaria.
"Total gold demand in the third quarter surpassed US$100 billion for the first time,” says Juan Carlos Artigas, global head of research at the World Gold Council.
Over the past five years, the gold price has increased by more than 81%.
With gold bars typically weighing about 400 ounces, the latest price tag means each bar is now worth more than $1 million.
Investors have been turning to gold to guard against future interest rate cuts. In the UK, the base rate was reduced from 5.25% to 5% on 1 August, for the first time since 2020, and UK interest rates were cut further to 4.75% in November. Further cuts are expected in the UK and US this year.
The yellow metal also offers diversification to investors’ portfolios, and a means of preserving their wealth in an increasingly geopolitically uncertain world.
But the return of Donald Trump to the White House and his plans for trade tariffs on Chinese goods may have an impact on the direction of the gold price this year.
“If Trump’s tariffs take a bite out of international trade flows that would weaken the global economy and be supportive of gold,” says Laith Khalaf, head of investment analysis at AJ Bell.
“But equally if those tariffs also push up inflation, and keep central bank interest rates higher for longer, that’s negative for gold, which pays no income.”
We take a closer look at the reasons behind the global gold rush, before delving into whether more rises are on the horizon, and how you can invest in gold.
Why is the gold price rising?
There are three fundamental factors that have caused the gold price to rise over recent months: interest rates, central bank purchases, and geopolitical uncertainty.
Interest rates
History suggests the gold price does well when interest rates fall.
This is because central banks typically cut interest rates in an attempt to encourage growth when the economy is stagnating. Stock markets usually struggle in periods like this, so gold can be a good hedge.
“Gold, which pays no interest, becomes more attractive in a low interest environment”, says Josh Saul, chief executive of The Pure Gold Company.
The Fed’s rate-setting decisions are particularly important in determining the gold price – more important than the decisions made by other policymakers like the Bank of England, for example.
“For most of the third quarter, Western investors flocked back to gold as central banks started cutting interest rates,” says Artigas.
Central bank purchases
Central banks buying up gold is also causing the price to soar, with unprecedented purchases from emerging markets like China and India, as they hedge against global economic fragmentation.
Anita Wright, independent financial adviser at Bolton James, notes: "Central banks, particularly in countries like Russia, China, India and Turkey, have dramatically increased their gold purchases, reflecting growing mistrust in the US dollar. This trend is further fuelled by the countries accelerating their efforts towards de-dollarization.”
“The importance of gold in foreign reserves is well recognised,” says Artigas, for “the role it plays as a long-term store of value, as a diversifier, its performance in times of crises, and the fact that it does not carry credit risk.
“In an environment of ever-increasing sovereign debt and geopolitical uncertainty, gold’s role is well cemented.”
Geopolitical uncertainty
Interest rates aside, other factors on the global stage are also driving the gold price. The yellow metal is considered a safe-haven asset, so investors often flock to it during periods of volatility in an attempt to escape market shocks.
The world is currently witnessing turmoil in the Middle East, as well as the continuation of the conflict in Ukraine.
“Geopolitical relations remain fragile, reinforcing gold’s safe haven status, and government debt levels, especially in the US, are high and rising, and unlike sovereign bonds, gold carries no credit risk," adds Khalaf.
"It can also be buried in a vault, which if you’re a country or individual worried about international sanctions, is a bonus."
Will gold continue to rally?
Experts predict that if the trio of low interest rates, a weak dollar and high demand from central banks continues, the gold price may well rise further - especially if geopolitical tensions also persist.
“As we look into 2025, market consensus suggests that the Fed will deliver 100 basis points in cuts by year end, with inflation softening but still above target,” says Artigas. “The US dollar is expected to remain flat or slightly weaken as conditions normalise, while global growth remains positive but continues to grow below trend.
“In this context, the actions of the Fed and the direction of the US dollar will continue to be important drivers for gold.”
However, he adds that there are wider factors at play that influence the gold price, including economic expansion, risk, opportunity costs (particularly compared to bond investments), and momentum.
Factoring all these influences in, Artigas and the World Gold Council expect gold price performance in 2025 to be “rangebound, with slight upside”.
Other observers are less tentative in their bullishness. Goldman Sachs’ gold price outlook sees the yellow metal clearing the $3,000 mark by the end of 2025.
Similarly, Eric Strand, founder and CEO of AuAg Funds, said in the HANetf’s 2025 outlook that the inflationary cocktail will send the gold price above $3,000 during the year, and perhaps as high as $3,300.
The impact of Donald Trump’s second term in the White House is also hard to predict. He is thought likely to take a pro-business stance which will chiefly benefit equities, via the stock market.
“The question, however, is whether these policies will also result in inflationary pressures and disruptions to supply chains,” says Artigas. “In addition, concerns about European sovereign debt are once again mounting, not to mention continued geopolitical instability, particularly in light of the events in South Korea and Syria in early December.
“In all, this could prompt investors to look for hedges, such as gold, to counter risk.”
Then there is the question of inflation and its knock-on effects on interest rates, particularly in the US.
“The Fed is aiming to engineer a hard-to-come-by soft landing,” says Artigas. “It has so far managed to cool inflation without taking the wind out of the sails of the economy. But 2025 will likely not prove easy.
“Overall, a more dovish Fed will be beneficial for gold, but a prolonged pause or policy reversal would likely put further pressure on investment demand.”
Ways to get exposure to gold
There are three main ways to invest in gold. The first one is investing in the metal itself through a financial contract, such as an exchange-traded product. See our article on the best gold ETFs.
You can also get indirect exposure by investing in the miners that dig gold out of the ground. This can be done by investing directly in their shares, or by buying a gold fund or investment trust.
Lastly, you can buy physical gold bars or gold coins.
In terms of how much gold to hold in a portfolio, Tom Stevenson, investment director of personal investing at Fidelity International, suggests that around 5-10% is a good amount – which is about the same as you might hold in cash.
“The two offer insurance and dry powder to complement the growth and stability of the shares and bonds that make up the bulk of a balanced portfolio,” he comments.
Khalaf adds that while gold is well-known as a safe haven, it is volatile and has spent long periods going sideways, or backwards.
He says: "It should be seen as a means of diversification for equity holdings alongside bonds and cash, and as such should not normally exceed 5% to 10% of a portfolio.”
-
Is Wise a trillion-dollar opportunity for investors?Foreign-exchange transfer service Wise has the potential to become the Amazon of its sector – here's why you should consider buying this stock now
-
How did emerging markets perform in 2024?Emerging markets underperformed their developed counterparts in 2024, but there are signs of recovery. We look at the biggest winners and losers of 2024, and the key trends shaping these markets
