Gold prices are forecasted to experience a modest increase in 2025, despite expectations of a stronger U.S. dollar and rising Treasury yields, according to Capital Economics. While a revival in Chinese demand and ongoing central-bank purchases are expected to provide support, the outlook for the precious metal remains uncertain.
Gold prices surged to record highs just over a month ago. The most active Comex gold futures contract topped $2,800 an ounce on October 30, before retreating. On Monday, the February contract fell by $22.50, or 0.8%, settling at $2,658.50 an ounce. This recent decline is attributed to a post-election rally in the dollar and a ceasefire between Israel and Hezbollah, which has reduced demand for gold as a safe-haven asset, according to Joe Maher, assistant economist at Capital Economics.
The drop in gold prices following the U.S. election results has been surprising, considering the expectations that the victory of President-elect Donald Trump would drive gold prices higher. “Gold’s post-election slide is somewhat unexpected, especially given its status as part of the ‘Trump trade,’” Maher noted. Despite this, most other “Trump trades” have seen gains, while gold has faltered.
Capital Economics has raised its forecast for the U.S. dollar and Treasury yields through 2025, following Trump’s win. The firm now predicts that the ICE U.S. Dollar Index will rise by around 4%, and real yields will increase from their current levels by 2025. Given the typical inverse relationship between the dollar, real yields, and gold prices, this suggests downward pressure on gold in the coming year.
Higher real interest rates tend to discourage investment in gold, as they raise the opportunity cost of holding the non-interest-bearing asset. However, Capital Economics cautioned that a stronger dollar and higher yields do not guarantee that gold prices will decline. “There have been numerous instances when the dollar appreciated, yet gold prices still rose,” Maher stated, emphasizing that the strength of these relationships can vary from year to year.
In addition to the traditional economic drivers, gold’s price could also be supported by several “nontraditional” factors. Capital Economics highlights a potential rebound in Chinese demand for gold in 2025, following a dip earlier this year. Despite a structurally slowing economy, low returns in Chinese equities, and ongoing issues in the property sector, gold may become more attractive to Chinese investors. Furthermore, central banks are likely to continue building their gold reserves, particularly in light of the 2022 seizure of $300 billion in Russian central-bank reserves after the invasion of Ukraine, which raised concerns about the weaponization of economic power.
Concerns over fiscal sustainability and growing global public debt could also support gold prices. “Waning confidence in fiat currencies, driven by the increasing burden of public debt, is seen as a key factor behind the recent rise in gold prices,” said Maher.
Considering these factors, Capital Economics predicts that gold prices will rise modestly in 2025, reaching around $2,750 an ounce by the end of the year, up from current levels of approximately $2,650. However, the firm cautioned that this forecast remains subject to significant uncertainties, particularly related to the strength of the dollar and Treasury yields.
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