Gold vs US, Aussie equities in 2024

Source: Bloomberg. (n.d.) Accessed on 04/11/2024

What drove gains in the gold price in 2024

Gold enjoyed several tailwinds this year. Price drivers spanned from geopolitical tensions and central bank purchases to Chinese economic weakness and even the US presidential election. 

Starting in the first half of the year, Asian central bank purchasing was the major driver of gold’s performance, as the chart below shows. 

With geopolitical conflicts raging across Europe and the Middle East, global central banks bought gold as a hedge against market volatility. Both the Chinese and Indian central banks added significantly to their gold reserves earlier in the year, while European central banks such as Poland have continued to buy heavily as a hedge against geopolitical escalation [2]. 
 

Central banks, gold investors drove gold performance in 2024

Source: World Gold Council. (n.d.) Central Bank Monthly Update, Total Known ETF holdings. Accessed on 11/11/2024.

Past performance is not an indicator of future performance. 

Then, in the latter half of 2024, interest rates became a key part of gold’s narrative. Gold is a non-yielding asset and, according to Global X analysis, has historically outperformed in low-interest rate environments where it does not need to compete against savings accounts or bonds and treasury bills. 

So, just as central bank purchases started to cool, investors took over the baton and drove gold further upward on expectations of lower interest rates in the US. 

Those bets were vindicated when the US Federal Reserve cut rates by 0.50% in September, a surprisingly aggressive move that boosted gold to new heights [3].  

Last but not least, the US presidential race was also a source of volatility for markets, which may have made gold a more attractive portfolio hedge in the lead up to the election results in November.
 

Outlook for Gold in 2025

A perfect concoction of bullish factors saw gold outperform in 2024. But with the New Year approaching, many investors are asking: will gold still perform in 2025? 

As with any attempt at forecasting the future, there are numerous scenarios to consider. Below are some of the most prevalent bull and bear cases for gold in the New Year.
 

Bull Case – Inflation Cools, Interest Rates Fall

As covered in the summary of gold’s performance in 2024, the precious metal tends to outperform in low-interest rate environments. 

One of the key bull cases for gold in 2025 is that the US Federal Reserve could continue its rate-cutting campaign. The market currently expects the Federal Reserve to cut interest rates by as much as 1.25% by December 2025 [4]. 
 

Bull Case – Weaker Economies, Weaker Equities

While the risk of weaker stock market returns may be alarming to most investors, gold has historically outperformed when global equity markets have fallen. 

Some investors use the precious metal as a portfolio diversifier, specifically for its ability to move in an uncorrelated direction to traditional assets, such as equities. 

In Global X’s view, if the global economy fails to pick up steam in 2025, gold could potentially gain appeal as an alternative investment to traditional assets. 

Furthermore, downward moves in equity markets tend to come with bouts of volatility, which might also improve demand for gold, as the chart below shows.

Gold's performance during the worst quarters for the ASX 200 (Last 20 years)

Source: Bloomberg. Data from June 2003 to June 2024.

A weaker Chinese economy might also encourage Asian investors to allocate toward gold. Chinese equities have fallen for the majority of 2024, real estate remains in the doldrums despite government support, and the local currency is under threat from potential tariffs to be enacted by US President-elect, Donald Trump. 

Indeed, Asian investors have been some of the strongest buyers of gold in 2024 [5]. In Global X’s view, should the Chinese economy fail to recover in 2025, that buying pressure could once again materialise for gold. 
 

Bear Case – High Interest Rate, Bull Run

In Global X’s view, if equities fly high and interest rates remain elevated in 2025, gold could lose some of its appeal. Precious metals can potentially act as portfolio diversifiers, an investment insurance policy (so to speak) that may help protect against market volatility.

When the stock market is providing outsized returns and the economy looks strong, investors historically have been inclined to risk more, and less likely to seek diversification or protection through gold. 

The same can also happen if risk-free assets such as US treasury bonds continue to provide competitive yields - making a non-yielding asset such as gold less compelling. 
 

How to Use Physical Gold in a Portfolio

What does this all mean for investors who are considering allocating part of their portfolio to physical gold?

First, in Global X’s view, it is important to recognise that gold is best used as a portfolio diversifier or hedge against market volatility – not as a speculative asset for price appreciation. That said, gold sometimes provides outsized returns, as evidenced by its stellar performance in 2024. 

Overall, for long-term buy-and-hold investors, the key metric to consider should be one’s risk profile. Investors who require more portfolio insurance (they are less risk tolerant) might consider allocating more of their portfolio to gold as a hedge against potential market risk. 

But for tactical traders who have a strong view on markets and economic conditions, the above bull and bear cases provide some insight into how gold may react in some potential scenarios.

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[1] Bloomberg. (n.d.) Accessed on 08/11/2024.

[2] World Gold Council. (n.d.) Central Bank Monthly Purchases. Accessed on 08/11/2024.

[3] CNBC. (September 18, 2024). Fed slashes interest rates by a half point, an aggressive start to its first easing campaign in four years.

[4] CME Group. (n.d.) Fedwatch tool. Accessed on 08/11/2024.

[5] World Gold Council. (n.d.) ETF buying by region. Accessed on 08/11/2024.