Gold became a standout performer in 2024 as headwinds turned to tailwinds. Supported by geopolitical tensions, rate cuts and robust central bank buying, the price of the yellow metal surged by 27% to hit record highs.
It has been more of the same this year, plus a further increase of 10.5% in dollar terms. Banks such as UBS and Goldman Sachs have hiked their forecasts for physical gold to peak beyond $3,000 this year.
We are now well into the midst of Trump 2.0, a move which was initially seen as a negative for gold when Donald Trump won the US election in November last year and announced plans to cut government expenditure and reduce the debt burden.
Tariffs have been the Trump buzzword ever since, with the inflationary nature of his policies (a positive for gold in itself) coupled with the threat those policies pose to the global economy.
Increased safe-haven demand amid this tariff backdrop has resulted in gold bars moving to the US at a record pace. This is because there is a window of opportunity with gold futures in New York rising by about 11% already this year. Estimates are that 2,000 tonnes have travelled to the US in the past couple of months alone.
Scope for further gains?
Although the market expected the debt burden in the US to be reduced when Trump initially won, it is now realising the process will take some time and the debt is likely to rise substantially in the coming years, according to Georges Lequime, manager of WS Amati Strategic Metals. He cited the Congressional Budget Office upgrading their economic forecasts, with US national debt set to rise by $23.9trn over the next decade.
“In 2025 alone, close to $9trn of debt needs to be refinanced at higher interest rates. This will put further pressure on government spending, so there is little surprise that central banks are diversifying their reserves by holding some gold,” he said.
“Rising geopolitical tensions – especially the threat of confiscation of US treasuries held by nation states – is also leading to central banks’ desire to increase their gold holdings. We think this could accelerate under Trump as trust between nations diminishes.”
A resumption of the inflationary measures many expect under Trump – coupled with interest rates potentially falling, bringing the real rate closer to zero – would be a very strong environment for gold to make bigger gains.
Jupiter Gold & Silver fund manager Ned Naylor-Leyland believes that expectations for economic expansion, yields and inflation suggest a positive but possibly more modest growth for gold in 2025.
“Upside can come from lower-than-expected interest rates, rising volatility or continued above-average central bank gold demand. Higher-than-expected interest rates would be a headwind for gold,” he said.
“However, we believe that the risk emanating from the quantum of debt that has flowed into the global financial system to finance surging government spending is underappreciated and not adequately priced or discussed in markets. The US leads the way, with a fiscal debt pile of around $1.9trn. At what point does the financing of all this debt undermine the risk-free status of US treasuries and the US dollar?”
Arguably the biggest reason to suggest there may be further gains for gold is that the broader market isn’t participating. I recently read that in 2011, fund participation in the gold bull market reached up to 20% of equities in portfolios. This time around the exposure to gold is less than 3%.
There are reasons for that – notably the strong returns from equities over the past decade and, more recently, the risk-free rate on government bonds, but it will be interesting to see what happens to the gold price if we do see wider participation, given the current price.
Can gold equities follow suit?
Gold mining shares have not kept up with the rise in physical gold. BlackRock World Mining Trust co-manager Evy Hambro pointed to production costs rising significantly from 2021 to 2024 as inflationary pressure emerged, which held back share price performance, although there is potential for further growth.
“We are excited about the potential for an improvement in margins from here, given high gold prices and costs appearing to stabilise,” he said.
“Merger and acquisition activity has also increased, with AngloGold Ashanti’s £1.9bn bid for Centamin the latest example. We believe this consolidation may continue in the year ahead.”
Not only can companies substantially increase their cashflows in a high gold price environment, but they can also substantially grow their businesses through exploration, as well as mergers and acquisitions.
Lequime also pointed to a unique attraction in terms of beta in a gold bull market for gold equities. “Usually the beta to gold you can expect in a gold bull market is closer to 2-2.5x, with mid-cap shares having a greater beta to larger companies – although they tend to be late movers in the cycle. At the moment, the beta for both is around 1.5x, with large-caps having already rallied quite strongly. So we think it is only a matter of time for the mid-caps and developers to catch up over the coming months.”
I remember talking to Orbis Global Balanced manager Alec Cutler, who explained that perhaps the most important quality of gold is that it is trust-less. Gold is not anyone else’s liability, making it even more valuable when trust is in short supply.
While physical gold is far from cheap, there are tailwinds to suggest there is scope for further gains from here. I could not argue that government bonds are not a valid alternative, but in a world where geopolitical uncertainty is likely to increase, gold offers a degree of security and comfort.
Darius McDermott is managing director of FundCalibre. The views expressed above should not be taken as investment advice.