Gold faces a two-way risk in 2025, with the Fed's monetary policy decisions, Trump's economic and foreign policies, and geopolitical developments becoming the main drivers.

Bearish scenario
A de-escalation of geopolitical tensions in the Middle East and/or a resolution to the Russia-Ukraine crisis could trigger a sharp downward correction in Gold prices, given how much the precious metal benefited from these conflicts throughout 2024. Trump's "America First" approach suggests that his administration will be focused on domestic policies and possibly not prioritize international affairs. In this regard, Trump could aggressively look to initiate a resolution process in the first months of his presidency.

A hawkish tilt in the Fed's policy outlook could weigh on Gold prices next year. A lack of progress in disinflation and heightened uncertainty surrounding the inflation outlook, especially if Trump carries on with increased tariffs, could cause policymakers to refrain from gradually lowering interest rates. Unless there is a significant downturn in the labor market, the Fed could afford to adopt a more patient stance without worrying about potentially causing a recession.

Moreover, the performance of the Chinese economy could influence Gold's demand outlook in 2025. In case Trump ramps up tariffs on Chinese imports, China could retaliate, paving the way for another trade war. As a result, a weaker economy in China, the world's biggest consumer of Gold,could negatively impact prices.

Bullish scenario
A continuation of policy easing by major global central banks could help Gold push higher in 2025. If there are no inflation shocks, the Fed could continue to steadily reduce the policy rate, causing US T-bond yields to enter a downtrend and boosting XAU/USD. Even if the Fed becomes reluctant to cut rates, Gold could still capture capital outflows from the Euro and the British Pound, and stay resilient against the USD, if the ECB and the Bank of England (BoE) ease the policy aggressively.

An improving Chinese economy could positively impact Gold prices as well. In early December, a meeting of top Communist Party officials, the Politburo, showed that China is planning to adopt an "appropriately loose" monetary policy next year, alongside a more proactive fiscal policy, to spur economic growth. The good news for China is that the annual inflation, as measured by the change in the Consumer Price Index (CPI), softened to 0.2% year-over-year in November. Hence, China could stimulate the economy without paying any attention to inflation.

A further escalation of geopolitical fears could allow Gold to continue to capitalize on safe-haven flows. A widening conflict in the Middle East with a new confrontation between Iran and Israel, or either Russia or Ukraine's refusal to reach a truce, could cause investors to seek refuge in the precious metal.
Central bank demand
One of the main catalysts for Gold in 2024 was central bank buying.

"Central banks will remain an important part of the puzzle. Central bank buying is policy driven and thus difficult to forecast, but our surveys and analysis suggest that the current trend will remain in place," said the World Gold Council in its 2025 outlook report for Gold. "In our view, demand in excess of 500 tonnes (the approximate long-term trend) should still have a net positive effect on performance. And we believe central bank demand in 2025 will surpass that. But a deceleration below that level could bring additional pressures to Gold.(Cay) Newmaker23

Source: Fxstreet