Gold prices surged to a more than two-week high amid China’s return on gold buying and rising geopolitical tensions following the Syrian unrest. However, an analyst suggests caution.
Gold prices rose for the past two trading days, fuelled by mounting haven demands and China’s renewed gold purchases. Expectations for further rate cuts by major central banks have also contributed to the precious metal’s upside momentum. The gold rally extended into the Asian session on Wednesday, with gold futures on the Comex climbing 0.71% to $2,737 (€2,603) per ounce as of 5:12 am CET.
Geopolitical tensions drive haven demand
Over the weekend, Syria’s rebel army captured the capital, Damascus, ending Assad’s 50-year regime. The political shift, combined with the ongoing Middle East conflicts have heightened global political and economic uncertainties, boosting demand for traditional safe-haven asset gold. A similar surge was also seen in late November amid a major war escalation between Ukraine and Russia.
China’s renewed gold purchases and economic stimulus
On Monday, Chinese top officials pledged to adopt “a more proactive fiscal policy”, in 2025. Analysts expect the world’s second-largest economy to impose more easing policies through rate cuts, raising deficits, and increasing government borrowings.
Additionally, the People’s Bank of China said it resumed buying gold reserves in November after a six-month hiatus.
Ray Jia, head of research for China at the World Gold Council, noted in a recent report that gold demand in China is expected to stabilise in 2025, supported by anticipated rate cuts and heightened economic pressure amid Trump’s tariff threats.
Central banks poised for further rate cuts
Investors will be closely watching major central banks’ rate decisions for the remainder of the week, with widespread expectations of further monetary easing. The Bank of Canada (BoC) is expected to lower its policy rate by 50 basis points later today, while the Swiss National Bank (SNB) and the European Central Bank (ECB) are anticipated to deliver 25 basis point cuts each. Falling interest rates reduce the opportunity cost of holding gold, supporting its appeal as a store of value.
In the US, inflation data for November, due this week, will play a critical role in shaping the Federal Reserve’s monetary policy outlook. Markets expect the annual headline Consumer Price Index (CPI) to edge higher to 2.7% from 2.6% in October, reinforcing expectations for another 25 basis point rate cut next week.
Bearish factors for gold
Despite the recent rally, bearish factors remain. Michael Brown, a senior research strategist at Pepperstone wrote in a note on Tuesday, “I’m still in ‘wait and see’ mode here, particularly when gold’s rally on Monday came despite Treasuries selling-off across the curve, as the curve itself bear steepened.”
Historically, gold prices move inversely to the US dollar and government bond yields. A strengthening dollar and rising bond yields exert downward pressure on gold prices, while a weaker dollar and declining yields typically support gold.
Following Trump’s recent electoral victory, the dollar has strengthened, and US government bond yields have surged, driven by expectations that renewed tariffs will increase inflationary pressures and prompt the Federal Reserve to tighten monetary policy.
This week, the dollar and US 10-year government bond yields have shown renewed strength, posing potential headwinds for gold. A stronger-than-expected US CPI reading could amplify these pressures, leading to a significant near-term pullback in gold prices.
