Capital Economics believes that despite the strengthening of the dollar and expectations of rising U.S. Treasury yields, China's demand for gold is showing a 'recovery' and central bank purchases may lead to a slight increase in gold prices next year.
Joe Maher, assistant economist at Capital Economics, stated in a report on Monday that the recent drop in gold prices partially reflects the post-election surge of the dollar and the ceasefire between Israel and Hezbollah, which may help alleviate the safe-haven demand for dollar-denominated gold.
Maher stated that considering gold was seen as part of the 'Trump trade' before the election, the post-election drop was somewhat unexpected. 'In contrast, after Trump's victory, gold prices fell while most other 'Trump trades' succeeded.'
Following the election of President Trump, Capital Economics raised its forecasts for the dollar and U.S. Treasury yields by the end of 2025. It now expects the dollar index to rise by about 4% next year, with real yields slightly increasing from current levels by 2025.
Maher stated that given the 'typical negative correlation' between the dollar, real yields, and gold prices, this suggests that gold prices will face pressure next year, adding that higher real rates usually hinder investment demand for gold because they increase the opportunity cost of holding this non-yielding asset.
However, Maher also noted that 'a stronger dollar and rising yields do not guarantee that gold prices will fall' and pointed out that over the years, gold prices have also risen alongside a strengthening dollar. Although gold and its potential drivers do exhibit a tendency to move in opposite directions, 'the strength of these correlations may vary from year to year.'
Maher indicated that some 'unconventional' drivers for gold may further support prices in 2025, and he anticipates a 'significant reversal' in Chinese gold demand next year.
Meanwhile, Maher said, 'There is also room for central banks to continue increasing their gold reserves,' pointing out that after the outbreak of the Russia-Ukraine conflict in 2022, the U.S. and its allies froze $300 billion of Russian central bank reserves, highlighting their willingness to use economic power to punish enemies.
He said, 'For countries that may be concerned about their assets being confiscated by the West, there is still significant room to continue diversifying their reserve assets with gold.' However, these changes may be 'generally slow', and while Capital Economics predicts a rising trend in global central bank gold demand in the coming years, it could 'slightly decline from recent highs.'
The World Gold Council's quarterly report released in late October showed that central bank gold demand in the third quarter was 186.2 tons, a year-on-year decrease of 49%, but the purchase volume so far this year remains strong at 694 tons.
Maher stated that as concerns over 'fiscal sustainability' are unlikely to disappear, gold may also receive support. 'In the context of rising global public debt, the weakening of confidence in fiat currencies has been considered a potential driver for the recent historic highs in gold prices.'
Taking all these factors into account, Capital Economics believes that gold prices will rise next year, although the increase will not be large. The firm expects gold to rise from the current level of about $2,650 to about $2,750 per ounce by the end of 2025.
Article reposted from: Jin Shi Data
