The future of gold as a safe haven in 2025: What role do a weakening dollar

16 Aralık 2024

The Future of Gold as a Safe Haven in 2025: What Role Do a Weakening Dollar and Falling Bond Yields Play in Enhancing Its Appeal?

Written by: Rania Gule, Senior Market Analyst at XS.com

Gold is experiencing mixed movements in the market, drawing relative support from the weakening U.S. dollar and declining U.S. Treasury yields. On Monday, it is trading at $2,664. Despite being under selling pressure from last week’s market activity, investors are closely monitoring developments in monetary policy and geopolitical conditions, both of which play a crucial role in shaping gold’s future direction.

In my view, the weakening U.S. dollar and falling bond yields create a supportive environment for gold, especially as the dollar pulls back from its recent gains. This decline reflects investors’ caution ahead of the Federal Reserve’s interest rate decision. Although the market has priced in a rate cut, the anticipated gradual pace of easing next year adds complexity to the outlook. This scenario, in my opinion, suggests that gold’s support may remain limited unless market expectations of the Federal Reserve surpass the projected level of monetary easing.

The pressure on gold becomes apparent as it approaches the critical support level of $2,635. Breaking below this level could lead to additional downward pressure. However, I believe that the decline in U.S. Treasury yields offers an incentive to maintain price stability in the near term. Investors typically turn to gold as a haven when yields drop, making this factor pivotal in sustaining positive momentum for the price.

Geopolitical tensions in the Middle East add another dimension to gold’s movements. The ongoing military escalation in the region enhances gold’s status as a haven. In my opinion, these geopolitical tensions may continue to provide long-term support for the precious metal, but they alone may not be sufficient to counteract pressures stemming from currency movements and monetary policies.

From an economic perspective, U.S. data indicate a notable slowdown. PMI readings are expected to show a contraction in manufacturing activity and a deceleration in the services sector. Furthermore, the Empire State Manufacturing Index is anticipated to witness a significant decline.

While these data points might weigh on the U.S. dollar, their immediate impact on gold could be limited ahead of the Federal Reserve’s decision. In my opinion, this highlights a state of cautious anticipation in the markets, with a stronger focus on monetary policy directions than on immediate economic indicators.

Additionally, the expectation that Donald Trump’s policies may trigger inflationary pressures adds complexity to the outlook. If these expectations prove accurate, they could bolster the dollar in the long term, posing an additional challenge for gold. In my view, this factor suggests that gold might remain confined to a narrow range unless significant changes occur in the economic or geopolitical landscape.

Overall, gold appears to be navigating a volatile environment, oscillating between pressures from monetary policy expectations and support from the weakening dollar and geopolitical tensions. In my opinion, the positive opportunities for gold may be temporary unless the markets experience major shocks, either from the Federal Reserve or through escalating international conflicts. Cautious anticipation and calculated trades are likely to remain the defining characteristics of gold’s movements in the coming period, making investment decisions more complex for those seeking long-term stability.

 

Zaid Barem / YMM