Extraordinary year for gold coming to extraordinary end: Julius Baer
The short-to-medium-term US economic outlook might bring more headwinds than tailwinds for gold, extending the current consolidation, says Julius Baer next generation research head Carsten Menke.
On Wednesday, the US Federal Reserve (Fed) lowered the benchmark interest rate for a third consecutive time, signalling caution for the months ahead amid prevailing concerns about inflation — implies fewer rate reductions next year. This pushes up the US dollar and US bond yield while weighing on gold, says Menke.
“Riding the holiday roller coaster, prices lost as much as 2.5% from Wednesday’s high. They regained some lost ground in early Thursday trading following a call from president-elect [Donald] Trump to block a funding deal that threatens a shutdown of the US government,” he adds.
“Looking back, such shutdowns have never had a lasting impact on gold, as they are primarily about political power games, causing more noise than news for financial markets more broadly.”
More importantly, the Fed’s statement serves as a strong reminder that gold is not an inflation hedge per se — even though it enjoys this reputation, Menke highlights.
He notes that gold does not hedge against a “good inflation” resulting from a strong economy such as the US, which is countered by more restrictive monetary policy. In contrast, gold does hedge against “bad inflation” related to irresponsible fiscal and monetary policy, leading to a fundamental loss of trust in a currency and resulting in a massive devaluation.
In the longer term, potential risks related to Trump's policies and the resumption of central bank gold buying should push prices higher again. As Julius Baer sees it, central bank gold buying is the strongest structural force in the gold market in 2025 and beyond.
“Short-term setbacks should thus be seen as longer-term buying opportunities,” Menke concludes.
Source: https://www.theedgesingapore.com/