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Gold is on a tear. The precious metal hit record highs this week and is already up 8% year-to-date. Initial forecasts from major banks and economists pointed to the possibility of gold breaking the USD 3,000/oz level amid escalating geopolitical tensions and strong central bank buying. Yet the Federal Reserve’s newly signaled reluctance to cut rates as aggressively as once thought has raised a key question: Will monetary policy headwinds slow the gold rally, or merely deflect its ascent?
Demand-side drivers
Earlier in the year, multiple banks set bullish targets on gold, largely in response to escalating trade disputes and geopolitical strains. In a note published Thursday, UBS revised their gold price forecasts upward:
While we acknowledge the current spot price of USD 2,870/oz is above our fair-value estimate, gold’s enduring appeal as a store of value and hedge against uncertainty has again proven itself. We have therefore raised our gold forecasts to USD 3,000/oz over the next 12 months.
In particular, trade tensions and geopolitical risk are cited as catalysts for the surge in demand:
In addition to tariff concerns that are likely to remain an overhang in the months to come as the US looks to address persistent trade deficits and “unfair” trade practices, there appears to be no immediate resolution in sight to the Russia-Ukraine war, and geopolitical tensions in the Middle East remain elevated... While the temporary ceasefire between Israel and Hamas is a promising development, a more sustainable agreement will be harder to negotiate.
Alongside trade and geopolitical factors, central banks also continue to be a major driver of gold prices — one whose influence is likely to grow. Their appetite for gold is unlikely to diminish soon, says Ewa Manthey of ING:
Gold’s rally in 2024 was driven by central bank buying, especially from China. Central banks are still buying and will probably continue to do so as geopolitical tensions and the economic climate continue to push them to increase their allocation towards safe haven assets. [Their] appetite for gold is also driven by concerns from countries about Russian-style sanctions on their foreign assets in the wake of decisions made by the US and Europe to freeze Russian assets, as well as shifting strategies on currency reserves. Looking ahead, we expect central banks to remain buyers.
Backing this view, the latest data from the World Gold Council reveals consistent and substantial buying activity. For the third consecutive year, central banks purchased over 1,000 tonnes of gold. In particular, buying surged in the fourth quarter, reaching 333 tonnes and bringing the total for the year to 1,045 tonnes.
A slower Fed easing cycle
While gold enjoys support from macro uncertainties, the Federal Reserve’s stance on further rate cuts may undercut gold's rally. Gold’s near‑term direction often hinges on how aggressively the Fed cuts interest rates, since lower borrowing costs generally encourage investors to hold non-interest-bearing assets like gold.
In line with a more cautious monetary approach, Federal Reserve Vice Chair Philip Jefferson said earlier this week that it’s appropriate to be cautious in adjusting interest rates and saw no hurry with policy move. On Thursday, Dallas Fed President Lorie Logan suggested that interest rates may already be near a neutral level, potentially preventing the need for further cuts:
What if inflation comes in close to 2 percent in coming months? While that would be good news, it wouldn’t necessarily allow the FOMC to cut rates soon, in my view.
These signals of restrained rate cuts are already influencing market projections. Fewer and smaller cuts this year may cool bullish sentiment. Reflecting that, Goldman Sachs has revised its outlook on gold, as reported by Bloomberg:
Goldman Sachs Group Inc. said it no longer sees gold reaching $3,000 an ounce by the end of the year, pushing the forecast to mid-2026 on expectations the Federal Reserve will make fewer rate cuts. Slower monetary easing in 2025 is set to crimp demand for bullion-backed exchange-traded funds, causing analysts including Lina Thomas and Daan Struyven to project prices will hit $2,910 an ounce by year-end. Weaker-than-expected ETF flows in December — driven by easing uncertainty after the US election — also contributed to a lower starting point for pricing into the new year.
Market participants currently forecast a 91.5% probability that the Fed will pause rate cuts at its March meeting, per CME’s FedWatch Tool.
Quick Hits
- US job data beats estimates: While January's job growth (143k) fell short of expectations (175k), upward revisions to previous months and a drop in the unemployment rate to 4% suggest a stronger labor market than initially reported.
- Oil under pressure: Oil prices are on track for a third straight week of decline, hurt by Donald Trump's renewed trade war on China and threats of tariffs on other countries.
- US tightens grip on Iranian oil: The US slaps new sanctions on tankers carrying Iranian oil, in an effort to drive the country's oil exports to zero.
- Japan eyes rate hike: A BOJ board member said the Japanese central bank must raise interest rates to at least 1% by the second half of the fiscal year, a remark that sent Japanese yen to two-month high against the dollar.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
