In the days ahead: Watching Asia’s reaction
In the coming days, it will be important to monitor the response from traders and investors in Asia—a key and consistent source of demand in recent months. Data from Morgan Stanley, which tracks “pit” versus “non-pit” trading activity in COMEX gold futures, shows a notable divergence: over the past month, gold futures declined by 5.9% during the “pit” session (08:20 to 13:30 EST), while gaining 14.7% during the “non-pit” session, which includes Asian and European morning trading.
While the short-term outlook for gold has become more challenging—particularly if the U.S. President adopts a less aggressive tone—some nervous calm could return to markets as we await greater clarity on the impact of tariffs on economic growth and inflation. We continue to maintain a positive long-term view on gold. However, having reached our USD 3,500 target, further upside beyond may require a worsening of economic or political conditions.
A reminder of some of the major supportive drivers for gold.
US Fed Funds rate expectations: Market participants closely watch interest rate expectations set by the Federal Reserve, as they heavily influence the attractiveness of gold. Currently, the futures market is pricing in the possibility of a 75–100 basis point rate cut before year-end, suggesting a more accommodative monetary policy. Lower interest rates reduce the opportunity cost of holding gold (which doesn’t pay interest), thereby supporting its price.
Investment demand for “paper” gold through futures and exchange-traded funds (ETFs): The demand for gold-backed financial products depends on technical market factors, such as price momentum, as well as macroeconomic indicators. In addition, a key factor for investors in ETFs is the cost of holding a non-yielding assets like gold, with the prospect for lower funding cost and recession worries boosting demand. Current known holdings in bullion-backed ETFs stands at 2773 tons, up 269 tons from last May but still well below the 2020 record peak at 3453 tons.
Rising US inflation expectations: Investors often turn to gold as a hedge against inflation. Recently, falling real yields (nominal yields minus inflation expectations) across the US Treasury yield curve have signaled growing concerns about future inflation. As inflation expectations rise, the real return on fixed-income assets decreases, increasing the relative appeal of gold.
Geopolitical risks: Global instability tends to push investors toward safe-haven assets like gold. A recent correlation between defense stocks and gold suggests that as geopolitical tensions rise—such as conflicts, wars, or diplomatic strains—investors seek safety in gold, thereby supporting its price. In addition, the current trade war adds downside risks to growth while lifting the geopolitical temperature, especially between the US and China, the world's two biggest economies.
Central bank demand amid continued focus on reducing dependency on the USD: A growing number of central banks are diversifying their reserves away from the US dollar, often turning to gold as a neutral reserve asset. Notably, China, India, Turkey, and Russia have been leading this trend. In the last three years to 2024, central banks bought more than 1,000 tons in each year, a process that looks set to continue in 2025 and beyond, thereby underpinning the market as supply is being removed from the market.
Strong Asian demand, particularly from Chinese investors, driven by concerns over domestic economic instability, weak real estate and stock markets, and as a hedge against potential Renminbi devaluation amid tariff-related export pressures.