On Wednesday, December 18, the gold market saw a continued decline as traders reacted to the imminent interest rate decision from the Federal ReserveThis momentous event is captured in the broader picture of economic trends, leaving investors with the pressing need to navigate uncertaintiesThe focus remains on uncovering potential shifts in monetary policy that may influence their investment strategies moving forward.
Spot gold was stable around the $2,647 mark during recent trading, following a slight drop of 0.2% the previous dayThroughout the week, the price of gold has generally hovered around the $2,650 threshold, pressured by a strengthening dollar, rising U.STreasury yields, and a growing sentiment that U.Sequities are improving
Following a record high reached at the end of October, gold prices have experienced a 4.7% retreat, raising questions about its short-term performanceNonetheless, analysts from UBS continue to remain optimistic about gold's future, pointing to a remarkable surge of nearly 29% year-to-date, a figure that greatly eclipses the performance of the S&P 500 index during the same period.
Looking further ahead, UBS forecasts that by the end of 2025, gold prices could potentially reach $2,900. This optimistic projection derives from anticipated increases in central bank demand, growing interest from investors, and the supportive backdrop of a low-interest-rate environmentThe confluence of these factors is compelling for those monitoring the precious metals market, indicating a strong possibility for gold to retain its allure as a valuable asset.
Global central banks have emerged as a pivotal driver of gold demand, actively engaging in strategies aimed at diversifying their reserves in response to broader trends of de-dollarization
- Dollar Retreats, Oil Prices Rebound
- The Downfall of Japanese Automotive Giants
- Slight Decline in the Dollar Index
- Dollar/Yen Hits Five-Month High
- Embrace Change with Patience
Data from the International Monetary Fund (IMF) highlights that in October, net gold purchases hit an annual high for that monthUBS has revised its forecast for central bank gold purchases in 2024, adjusting the anticipated figure from 900 metric tons to 982 metric tons, driven by the discovery of an underreporting trend in official dataAlthough this figure remains below the peaks recorded over the past two years, it signifies a stark improvement compared to an average of 500 metric tons per year since 2011.
As we look to the future, UBS projects that central banks will maintain a strong momentum in their purchases as the efforts toward reserve diversification continueExpectations suggest that by 2025, the buying volume could easily reach or exceed 900 metric tons, reflecting a robust demand from these institutional buyers.
Amidst persistent geopolitical risks and policy uncertainties, demand for gold is anticipated to rise as investors increasingly view it as a hedge for their portfolios
UBS has highlighted ongoing global tensions, particularly in the Middle East, alongside uncertainties in U.Sfiscal and trade policies that continue to induce concernSuch risks could further amplify demand for gold-backed exchange-traded funds (ETFs), thereby increasing the flow of capital into safer assets.
Low-interest rates are expected to provide additional support for goldThe Federal Reserve is forecasted to reduce rates by 25 basis points during its Wednesday meeting and to continue this trend into the following yearLower interest rates diminish the opportunity cost of holding gold since it does not generate interest income, effectively rendering it a more attractive investment when compared to interest-bearing securities.
Traders are eagerly awaiting the Federal Reserve's final policy meeting of the year, which is rumored to be a crucial juncture for future monetary policy directions
While the market generally anticipates that officials will announce another 25-basis-point cut, there is some ambiguity about the trajectory of policy in 2025, particularly in light of the potential for incoming officials to modify existing approaches to monetary easing.
Post-meeting, Fed officials may adjust the language in their policy statements and provide updated guidance on the expected path of borrowing costsThey will also reveal the latest quarterly economic forecastsTypically, a lower interest rate environment favors gold prices, mainly due to the fact that gold yields no interest which makes it relatively more appealing when rates are low.
Market participants are also keeping a close eye on U.Seconomic data to gain better insights into what 2025 might hold
This week, significant reports are set to be released, including GDP figures and the core personal consumption expenditures index, the Fed’s preferred gauge for assessing potential inflationary pressures.
Moreover, UBS anticipates that with low-interest rates and growing concerns about the trajectory of U.Sgovernment debt, the dollar may weaken in the medium termA declining dollar makes gold more affordable for international investors since it is priced in dollars, potentially leading to increased global demand.
Thus far this year, the price of gold has surged by over 28%, positioning it for its largest annual gain since 2010. This remarkable uptick can be attributed to an array of factors, such as U.Smonetary easing policies, heightened demand for safe-haven assets, and sustained buying from global central banks, each playing a role in shaping the market dynamics.
In addition, due to government tariffs being lifted, India's gold imports soared to record highs in November