In a surprise move, the Federal Reserve delivered a series of unexpectedly hawkish projections for its interest rate path in 2025, shocking the markets and sending gold prices tumblingDespite the immediate impact on the precious metal, analysts are telling CNBC that they still foresee strong support for gold in the coming year, suggesting that other factors may outweigh the Fed's tightening stance in the long term.
At the heart of the Fed's recent announcements was the updated "dot plot," which indicated that the central bank expects to cut interest rates twice in 2025. This forecast is a sharp contrast to the more dovish projections made in September, which called for four rate cuts of 25 basis points, driven by concerns about a softening labor marketCurrently, the Fed’s greatest concern is whether its imminent policy—especially its threat of imposing broad trade tariffs—will lead to inflationary pressures.
Following the Fed's Wednesday announcement, the U.S
dollar surged, with the dollar index hitting a two-year high, as market participants priced in the likelihood of continued interest rate hikesAt the same time, gold, which had been experiencing a remarkable rally and set new historical highs this year, saw a 2% drop, falling to its lowest level in a month.
The inverse relationship between the dollar and gold is well-knownSince gold is typically priced in U.Sdollars, a stronger dollar tends to push gold prices lowerMoreover, rising interest rates and increasing U.STreasury yields can lead to greater competition for safe-haven assets, further dampening gold demandAs a non-yielding asset, gold becomes less attractive when bond yields rise, prompting investors to shift their capital into U.STreasuries, which offer a risk-free return.
However, Hammad Hussain, commodities economist at Capital Economics, pointed out that these traditional market dynamics have been "sporadic" in recent years, as broader factors like central bank demand for gold have often outweighed the effects of dollar strength and U.S
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Treasury yields.
"The threat of tariffs and a more hawkish Fed certainly adds downside risks to gold pricesUnder normal circumstances, this would lead to a decline in gold pricesBut we expect non-traditional factors to be more influential next year," Hussain told CNBC over the phone.
Given this broader perspective, Hussain believes that gold prices will likely remain near historical highs throughout 2025. Despite the Fed's hawkish projections, analysts are looking at other macroeconomic factors that could provide a strong foundation for goldAmong these, a key driver is the ongoing demand from emerging market central banks seeking to increase the proportion of gold in their foreign exchange reservesThis trend, which has been in motion for several years, is expected to continue as central banks use gold as a hedge against global risks.
Janet May, Head of Market Analysis at Brewin Dolphin for RBC, echoed Hussain’s sentiment, suggesting that gold prices will continue to find support next year, despite the short-term headwinds created by a stronger dollar and rising real yields.
"Marginally, a more hawkish Fed, a stronger dollar, and rising real yields are bearish for gold in the short term
This is particularly true after this year’s strong rebound in gold prices and the growing appeal of cryptocurrencies as a digital store of value," May said in an email to CNBC.
Nevertheless, she emphasized that structural and cyclical factors will still provide support for gold pricesThese include the aforementioned increased demand from emerging market central banks and the fact that many investors continue to view gold as a crucial tool for diversifying risk in their portfolios.
The debate over whether cryptocurrencies, such as Bitcoin, could replace gold as the primary "store of value" asset has been ongoing for yearsCritics argue that digital assets lack the stability and long-established track record of gold, particularly during times of global instability.
Both gold and cryptocurrencies hold theoretical appeal as safe-haven assets in times of broader geopolitical and market turmoil
However, while gold has maintained its reputation as a reliable store of value, cryptocurrencies, especially Bitcoin, have often been subject to extreme volatility, making them less attractive to conservative investors.
Eva Manzi, a commodities strategist at ING, also weighed in on the outlook for gold, highlighting that geopolitical tensions, central bank diversification of foreign exchange reserves, and the possibility of continued interest rate declines are all creating what she calls a "perfect storm" for gold in 2025.
"In the wake of the Fed's statement yesterday, we did see a pullback in gold prices, but we believe the positive momentum for gold will persist in the medium term," Manzi said in an emailING forecasts that gold prices will rise from the current level of $2,595 per ounce to an average of $2,760 per ounce in 2025.
However, Manzi was quick to caution that her bullish outlook is more focused on the short- to medium-term, rather than the long run
Long-term headwinds, such as proposed tariffs and stricter immigration controls—policies that could potentially be inflationary—could eventually limit the Fed's ability to lower interest ratesAdditionally, a stronger dollar and tightening monetary policy could exert some resistance on gold prices in the long run.
Despite these challenges, analysts are largely optimistic about the outlook for gold, particularly as global risks continue to mountCentral banks around the world, especially in emerging markets, are likely to remain net buyers of gold, driven by concerns over currency devaluation and geopolitical instabilityFurthermore, gold’s role as a hedge against inflation and economic uncertainty remains unmatched by other assets, including cryptocurrencies.
One of the key factors in gold’s favor is its position as a "hard" asset, meaning it is tangible, scarce, and has intrinsic value
While digital currencies like Bitcoin may have their place in a modern portfolio, they lack the physicality and historical backing of goldGold has been a store of value for thousands of years, and this legacy is unlikely to be easily displaced by the relatively young world of cryptocurrencies.
Looking ahead to 2025, gold's resilience is likely to be tested by a combination of factors, including ongoing central bank actions, shifts in investor sentiment, and geopolitical developmentsHowever, given the current economic and market climate, gold is poised to remain a critical asset in many portfolios, offering both diversification and a hedge against the volatility that continues to characterize the global financial landscape.
Ultimately, the balance between traditional financial assets like gold and newer, more speculative assets like cryptocurrencies will likely continue to evolve