Gold Market Commentary: Riding a wave of uncertainty

Reassessing risk and reward

• The “Trump trade” – stronger dollar and US stocks – has taken a back seat amidst concerns about tariffs and hawkish foreign policies, conditions that will likely remain
• As governments look to increase military spending, budgets deficits are likely to increase and credit ratings to fall
• At the same time, despite inflationary pressures, markets expect a more dovish Fed, pricing in at least two full rate cuts by the end of the year
• These factors combined are creating a particularly supportive environment for gold.

Risk-off in, risk-on out

The “Trump trade” – which hinged on the pro-US growth agenda of the new administration and fuelled a dollar and stock rally post US election – appears to have faded. 

While European stocks continue to do well, the major beneficiaries have been risk-off assets such as Treasuries and gold (Chart 2).

Inflation is bubbling up 

Trump‘s campaign agenda hinged on a few key items, including: tariffs, immigration and tax cuts² – all of which have the potential to flare up inflation (Chart 3).

However, assessing the economic impact of tariffs is not straightforward: while they might be inflationary in a very strong economy, they could lower spending in a weaker one.³ And there are already signs that consumer sentiment in the US is beginning to falter: the University of Michigan consumer and expectation surveys are at their lowest level since 2023.⁴

Lower levels of immigration (and higher deportations) will likely lead to higher labour costs, although the strength of the labour market is key to determine its full effect. Nominal wages in the US are currently plateauing while potential large-scale Federal layoffs could increase labour supply. However, those workers are unlikely to fill the spaces left by immigration.

Tax cuts for businesses and the wealthy will boost growth and inflation. However, any anticipated boost from tax cuts has yet to materialise as they may take ‘months to negotiate’.⁵

Uncertainty, uncertainty, uncertainty

Investor nervousness has pushed bond prices higher and yields lower. Market participants now expect two full rate cuts by the end of the year…a far more dovish read from mid-January, pre-Trump inauguration. And the probability of a Fed hike appears to have peaked (Chart 4). 

While January inflation data generally runs hot, policymakers at the Fed seem content with the progress that has been made so far. At the same time, elevated uncertainty was heavily cited in the last meeting minutes, whether through tariffs, immigration or domestic policy, such as potential large-scale Federal layoffs, a nod to the Fed’s dual mandate of price stability and full employment.

What’s more, US Treasury Secretary Bessent’s comments that they are focused on bringing down the 10-year yield has also served to ease conditions somewhat.⁶

New world (dis)order?

Negotiations to end the Russia-Ukraine war have led to much handwringing and consternation, particularly across Europe during February. This has compounded already elevated geopolitical uncertainty as positive outcomes are by no means guaranteed and existing political alliances are being questioned.

Speculation that Europe will need to ramp up defence spending going forward – resulting in larger deficits – has already pushed up borrowing costs. Yield curves on European sovereign debt have become increasingly steep; short-term rates are falling while long-term rates remain high as expectations grow for an increased supply of long-dated debt (Chart 5).⁷

The UK has already committed to increase defence funding,⁸ and Germany’s future chancellor, Friedrich Merz, has begun discussions on the topic.⁹ For the latter, this could be further complicated by the potential need to rely on the support of fringe parties after a somewhat mixed election outcome.¹⁰ The performance of the European defence sector, one of the best this year, is reflecting the likely continuation of this trend.

Should a swift resolution to the Russia-Ukraine war be found – and importantly, this will need to be one agreeable to all parties – this could dampen any geopolitical risk premium in gold. But it remains to be seen whether real progress can be made and, if so, what the implications will be. Until then, it is likely that gold will remain well supported.

Chart 6: Weak technicals could temporarily challenge strong fundamentals

Intra-day movements of gold spot price and technical indicators*

Perfect conditions for gold?

Uncertainty appears to be the undertone across markets. Concerns over tariffs, and the wide-ranging impact they could have on global growth, continue to cast a cloud and question US exceptionalism. This has added to already rising geopolitical risk. Recent events have highlighted the need for greater military spending, which will likely result in even higher deficits.

There are several factors that could reinstate the thorny problem of higher inflation, especially at a time when deteriorating economic conditions may necessitate interest rates staying low. The US economy is likely in ‘stagflation’ and consumers appear to see it that way.¹¹

Historically, each of these drivers has individually been positive for gold. A move up in the GPR index of 100 points is typically linked to a 2.5% increase in the price of gold, all else equal. Similarly, a rise in 10-year break-even inflation expectations of 50bps is typically associated with an approx. 4% rise in gold prices. And a 50bps fall in 10-year Treasury rates over the long-run has been associated with a 2.5% rise in gold.^12,13

Although these drivers seldom occur simultaneously, their combined effect can create an environment in which gold can continue to perform positively.

It is worth noting, nonetheless, that a solid fundamental case for gold still has to scale the hurdle of a temporary technical stretched price. A retracement may create short-term headwinds but could also provide a welcome respite for uninitiated investors, as well as for consumer gold demand (Chart 6). In all, we expect gold to remain in the limelight given the current market conditions.

Footnotes

¹Based on the LBMA Gold Price PM as of 28 February 2025. Gold recorded an all-time high of US$2,936.85/oz on 19 February 2025.

² Here’s what Trump has promised to do in a second term, CNN, Updated January 2025 

³Tariffs are coming: How trade dynamics will shape aggregate demand and inflation, Centre for Economic Policy Research, January 2025

⁴University of Michigan Survey of Consumers, February 2025

⁵Trump Backs $4.5 Trillion Tax Cut in House GOP Budget Plan, Bloomberg, February 2025

⁶Bessent Says Trump Wants Lower 10-Year Yields, Not Fed Cuts, Bloomberg, February 2025

⁷Bond investors brace for Europe’s defence spending ‘bazooka’, Financial Times, February 2025

⁸UK to raise defence spending to 2.5% of GDP by 2027, Financial Times, February 2025

⁹Germany Discussing €200 Billion for Emergency Defense Fund, Bloomberg, February 2025

¹⁰“While the CDU & SPD secured enough seats to form a two-party grand coalition relatively swiftly, yesterday's results were not as bullish as we initially hoped for.” Vanda FICC Tactical Strategy, February 2025.

¹¹The University of Michigan consumer survey has seen a large uptick in inflation expectations for next year as well as expectations for unemployment to rise, both signalling the fear of stagflation taking hold.

¹²We estimate these sensitivities using the coefficients in our GRAM model across three different estimation windows: 17, 10 and 5 years. 

¹³While analysis based on a shorter window suggests that the effect may be lower – possibly closer to a 0.5% – as discussed in our January Gold Market Commentary – our contention is that gold’s stronger link to rates will be reestablished in a substantial falling rate environment.