In response to this threat, the central banks of countries that wish to remain non-aligned or independent of the US have become huge buyers of gold recently.
Since February 2022, total reported central bank buying has ramped up significantly thanks to emerging market and Eastern European countries like China, India, Poland, Turkey and Egypt.
Goldman Sachs also reported that central bank buying at the end of 2024 came in significantly higher than their expectations, particularly from China.
Cyclical support from consumers and investors
China and India are currently the world’s largest gold markets. More generally, Asia makes up more than 60 per cent of annual demand (excluding central banks), so these consumers and investors provide significant support for higher gold prices.
Over the past year, China has seen a boom in demand for gold jewellery, as the Chinese property crisis and slowing economy spurred a flight into gold. Gold buying was traditionally skewed to the older generation in China, but today 18-34 year olds constitute a third of China’s gold jewellery sales.
In the second half of 2024, Indian demand jumped thanks to strong economic growth and the reduction of customs duty on gold imports. In addition, global investor appetite for gold ETFs finally turned around in 2024, booking the first aggregate annual inflow in four years.
Trump, tariffs and a rising US budget deficit
Gold traditionally performs strongly in periods of uncertainty and when the economic outlook deteriorates.
While the initial reaction to Trump’s initial tariff announcements centred on the risk to inflation, Trump’s previous trade war with China suggests that it may be economic growth rather than inflation which is most at risk.
Any threat to US exceptionalism in terms of the equity market is net negative for the USD and net positive for gold. Given how stretched the USD is on a purchasing power parity basis currently, and how much volatility there is in currency markets, it may not take much for gold to rally strongly in USD terms.
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In fact, China is widely expected to announce fiscal stimulus in March. If the market deems this support to be meaningful, we may see the USD fall in Australian dollar terms and gold rally in USD terms.
Furthermore, if the US deficit widens further under the new administration, concerns around the serviceability of US government debt may dampen investor appetite for treasury bonds and weaken the USD.
Historically, there has been a strong correlation between rising US budget deficits and gold prices. In this climate, currency hedging your gold exposure is an important consideration.
Cameron Gleeson is a senior investment strategist at ETF provider Betashares.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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