In the early hours of December 19th, Beijing time, international gold prices experienced a rare plunge due to hawkish statements from the Federal Reserve's meeting, tumbling to $2596.7 per ounce with a daily drop of $64. Meanwhile, the US dollar index surged dramatically, breaking through the 108 mark to reach a new high. Analysts pointed out that the change in Federal Reserve policy expectations and the strong performance of the dollar were the main factors driving the decline in gold prices.
This month, the Federal Reserve announced a rate cut of 25 basis points to 4.25%-4.5%, in line with market expectations. However, the latest dot plot shows that the Fed expects two rate cuts each in 2025 and 2026, more hawkish than the previous market expectations. In his speech after the meeting, Fed Chair Jerome Powell further emphasized that future rate adjustments will be more cautious, considering further cuts only if inflation decreases significantly, which weakened the market's expectations for rate cuts and strengthened the dollar rapidly.
Strong Dollar Pressures Gold
The strong performance of the dollar increases the opportunity cost of holding non-interest-bearing assets like gold, dampening market interest in going long on gold. At the same time, recent strong US economic data, including rebounding inflation indicators such as CPI and PPI, and a resilient job market, further support the upward trend of the dollar.
Furthermore, as a safe-haven asset, gold's demand is often closely related to geopolitical tensions. Recently, geopolitical risks such as those in the Middle East and the Russia-Ukraine conflict have eased, diminishing the demand for safe havens, thus putting pressure on gold prices. For instance, the Israel-Lebanon ceasefire agreement came into effect on November 25th, and news of Russia-Ukraine peace talks emerged on December 12th, both of which have reduced some of the support for gold due to easing geopolitical tensions.
Changes in Gold Consumption Structure and Global Central Bank Gold Purchases
Despite significant fluctuations in gold prices, data show that the global gold consumption structure is changing. The overall consumption of precious metals has not seen a significant recovery, with jewelry consumption declining, while investment-grade monetary gold consumption remains relatively strong. According to the World Gold Council, the total global central bank gold purchases reached 693.54 tons in the first three quarters of this year, with countries such as China, Russia, India, and Poland maintaining a steady gold-buying trend.
The continuous gold purchases by global central banks provide some support for gold prices, especially under the pressure of the rising dollar, as countries increase gold holdings to balance the risk of currency devaluation. Although central bank gold purchasing may slow down by 2025, the overall trend is expected to continue.
Outlook for Future Gold Price Trends
In the short term, gold prices still face some downward pressure. On one hand, the more cautious attitude of the Fed on rate cuts has reduced the market's enthusiasm for investing in gold; on the other hand, with the continuous strengthening of the dollar, the appeal of gold as a safe-haven asset decreases. However, after a sharp decline, the downward space for international gold prices might be limited, especially with the influence of geopolitical and central bank gold purchases, which could lead to a period of consolidation and oscillation for prices.
From a medium to long-term perspective, the US economy might face secondary inflation risks, with gold retaining its long-term investment value as an inflation-hedging asset. At the same time, the global central bank gold buying trend will continue to support gold prices. However, in a context where risk assets perform well, the overall yield of gold may not match high-risk assets like the stock market, so investors should allocate assets based on their own risk preferences.
Overall, gold appears bearish in the short-term but retains certain safe-haven and investment potential in the mid to long-term, although its return on investment could be relatively limited. Investors should pay attention to future Federal Reserve policies, US economic data, and further developments in geopolitics to gauge potential opportunities and risks in the gold market.
