Gold prices have surged past USD 2,800 an ounce for the first time, following an executive order by US President Trump imposing tariffs on Canada, Mexico, and China, with threats of similar action against the European Union. The uncertainty surrounding these tariffs has heightened fears of inflation, particularly in the US, and raised concerns about global economic growth. Initially, investors sought refuge in traditional safe havens such as the US dollar (USD) and Japanese yen before driving gold prices to record highs. Despite Trump’s decision to delay tariffs on Mexico and Canada, gold remains above USD 2,800 an ounce.
Given strong structural and cyclical demand, gold prices are likely to continue their upward trajectory. Gold serves as a hedge against escalating trade wars, geopolitical instability, and uncertainties surrounding US government debt and Federal Reserve independence.
Structural Support – Central Bank Demand
Amid rising geopolitical tensions, central banks have significantly increased their gold purchases in recent years. As a stable store of value, gold is an attractive option for central banks looking to diversify their reserves beyond foreign currencies such as the USD and US Treasuries. The US's response to the Ukraine invasion demonstrated its willingness to leverage the dollar-centric global financial system through severe economic sanctions, highlighting the risks of reliance on the USD.
To mitigate these risks, central banks from non-aligned or independent nations have become major gold buyers. Since February 2022, reported central bank gold purchases have quintupled, with countries such as China, India, Poland, Turkey, and Egypt leading the trend. Goldman Sachs also reported that central bank gold acquisitions at the end of 2024 exceeded expectations, particularly from China.
Cyclical Support – Consumer and Investor Demand
China and India represent the largest gold markets globally, with Asia accounting for over 60% of annual gold demand (excluding central bank purchases). This consumer and investor demand provides significant support for rising gold prices.
Over the past year, China has experienced a surge in demand for gold jewelry, driven by economic uncertainty stemming from the property crisis and a slowing economy. Traditionally, gold purchases in China were dominated by older generations, but today, individuals aged 18-34 account for one-third of China’s gold jewelry sales. Similarly, in the latter half of 2024, Indian gold demand spiked due to strong economic growth and a reduction in customs duties on gold imports.
Additionally, global investor appetite for gold exchange-traded funds (ETFs) reversed its multi-year decline, marking the first annual net inflow in four years.
Trump, Tariffs, and the US Budget Deficit
Gold tends to perform well during periods of economic uncertainty and downturns. While the immediate market response to Trump’s tariff announcement focused on inflation concerns, historical precedent from his previous trade war with China suggests that economic growth, rather than inflation, may be at greater risk. Any threat to US economic dominance could weaken the USD, benefiting gold prices. Given the current overvaluation of the USD on a purchasing power parity basis and high currency market volatility, even minor developments could propel gold prices higher in USD terms.
China is widely expected to announce fiscal stimulus measures in March. Should these measures prove substantial, the USD could weaken against the Australian dollar, further boosting gold prices in USD terms. Additionally, if the US budget deficit expands under the new administration, concerns over government debt sustainability may reduce investor demand for Treasury bonds, weakening the USD and reinforcing gold’s appeal.
Investors should also consider currency hedging strategies when managing gold exposure to mitigate exchange rate fluctuations.
Rick Maggi CFP, Financial Advisor Perth, Westmount Financial
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Disclaimer
This document has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.