Since our last article on gold, prices have increased, and the collective impact of economic uncertainty and geopolitical tensions has solidified its position as a safe-haven investment. Over the next 6-12 months, several factors will continue to affect the gold price, including central banks’ monetary policies, global economic development, and exchange rate fluctuations. While the outcome of these factors remains unknown, this article will focus on the potential scenarios that could unfold.
The Impact of Interest Rates on Gold
Historically, it has been argued that gold has a negative correlation with interest rates. When central banks decrease interest rates, a large part of the opportunity cost of investing in non-interest-bearing assets like gold is reduced, which subsequently increases demand.
In 2024, gold further strengthened as central banks decreased their interest rates, reinforcing gold as a value-keeping alternative investment. Forecasts published by major banks suggest that interest rates will continue to decrease in 2025, potentially providing continued support for the gold market. However, it is important to note that the interest rate market is dynamic and can change due to several factors including the economic recovery.
Geopolitical Tensions and Market Uncertainty
Geopolitical tensions and market uncertainty are strong drivers of gold prices. During international crises, conflicts, and trade-related problems, investors usually turn to gold as a safer asset. The last couple of years are a great example.
Inflation’s Dual Role
Inflation plays a dual role in gold markets. On one hand, gold acts as a hedge against rising inflation since its value tends to increase relative to inflation. When the purchasing power of fiat currencies erodes, investors tend to increase their exposure to gold. On the other hand, accelerating inflation can give central banks more influence, which will be explained in the next scenario.
Scenario: Accelerating Inflation and Increasing Interest Rates
If inflation starts to increase faster than central banks expect, they may have to change their strategy and raise interest rates. Initially, this could boost gold prices; however, higher interest rates increase the opportunity cost of holding gold. Other investments, like bonds, become more attractive since gold does not provide a current yield. This may reduce the demand for gold. A rise in interest rates could thus put downward pressure on the price of gold, especially if investors start shifting their assets towards fixed-income instruments.
However, to better understand the interest rate’s effect on gold, it is essential to make a distinction between nominal and real interest rates. Real interest rates are the nominal interest rate adjusted for inflation. If inflation rises so quickly that the increase in nominal interest rates still results in negative or low real interest rates, gold may still be attractive. Thus, some analysts emphasize that even if central banks raise interest rates, continued high inflation could keep real interest rates at a level that supports the gold price.
When inflation rises too much while interest rates are falling, an unexpected rate hike can cause market turbulence. Gold might jump at first as an inflation hedge but then struggle as higher rates make other investments more attractive.
Institutional interest and market sentiment
The positive price development has also been spurred by an increase in institutional interest. Large players such as central banks and hedge funds have increased their gold positions to diversify their reserves and protect against economic fluctuations. The increased inflow of demand further stabilizes the gold market, making it more resistant to the occurrence of uncertainty.
Over the next 6-12 months, factors such as interest rate cuts, geopolitical risks, inflation and currency fluctuations will play a crucial role. If inflation increases and central banks are forced to raise interest rates, the impact on the gold price will depend on the development of real interest rates and market expectations. In a negative real interest rate environment gold may remain attractive despite higher nominal interest rates, while an effective fight against inflation via interest rate hikes may lead investors to reallocate their portfolios towards other asset classes.
Risks
Credit risk of the issuer:
Investors in the products are exposed to the risk that the Issuer or the Guarantor may not be able to meet its obligations under the products. A total loss of the invested capital is possible. The products are not subject to any deposit protection.
Currency risk:
If the product currency differs from the currency of the underlying asset, the value of a product will also depend on the exchange rate between the respective currencies. As a result, the value of a product can fluctuate significantly.
Market risk:
The value of the products can fall significantly below the purchase price due to changes in market factors, especially if the value of the underlying asset falls. The products are not capital-protected
Product costs:
Product and possible financing costs reduce the value of the products.
Risk with leverage products:
Due to the leverage effect, there is an increased risk of loss (risk of total loss) with leverage products, e.g. Bull & Bear Certificates, Warrants and Mini Futures.