Investing.com — The market has seen significant price appreciation, with gains of 21% in 2024 and 32% in the past year. This strong performance has positioned gold as one of the few major asset classes to reach new all-time highs.
While other commodities, including precious metals like silver and platinum, have struggled, they have seen significant declines.
Unlike previous gold bull markets, this rally is taking place under unique circumstances, raising the question of what factors could potentially hold back the upward trajectory.
To understand what could disrupt this bull market, it is essential to first understand the factors driving the gold price higher. Analysts at Gavekal Research have identified several key factors that differentiate this market from its predecessors.
One of the most important factors is geopolitical tension. The freeze on Russia’s foreign exchange reserves in 2022 has made Western bonds less attractive to non-democratic countries. As a result, gold has become a more attractive alternative for central banks.
There is also the issue of runaway budget deficits in major economies such as the US, Britain and France. The pandemic has exacerbated these budget deficits, and they have remained stubbornly high.
“Fiscal deficits have generally soared during the pandemic but have remained stubbornly high in countries such as the US, UK and France, which should worry any long-term-oriented investor,” the analysts said.
The current political climate in the US is also contributing to gold’s rise. The ongoing election cycle is raising fears among investors as both major political parties propose policies that could further destabilize the economy.
Proposals for higher tariffs, price controls and large subsidies are seen as potential triggers for economic mismanagement, leading investors to turn to gold as a hedge.
Meanwhile, demand from emerging markets continues to play a crucial role in supporting gold prices. Physical demand for gold is largely driven by countries such as China, India, Saudi Arabia and Russia, which have shown remarkable resilience despite global market volatility.
“While most Western investors view gold as a hedge against currency depreciation, runaway government spending or even geopolitical conflict, the main driver of gold prices tends to come from emerging economies,” the analysts said.
Potential Risks to the Gold Bull Market
Despite the strong fundamentals supporting the current gold rally, several factors could potentially halt or reverse this trend.
A possible risk is a decline in economic dynamism in emerging markets. A sharp decline in trade or growth in these regions could weaken gold demand.
However, given the current strength of trade surpluses and economic stability in these regions, this scenario seems unlikely in the short term.
Another potential disruptor to the gold market could be the discovery of new, large-scale gold deposits. Increased supply as a result of such discoveries could lower prices. However, the gold mining industry is currently struggling to find new supplies, making this scenario unlikely.
A collapse in energy prices could also impact the gold market. Lower energy costs would reduce the operating costs of gold mining, potentially increasing production and lowering prices. Yet there is little evidence that energy prices will collapse anytime soon.
The Federal Reserve’s monetary policy plays a crucial role in influencing the price of gold. A more aggressive stance, such as delaying interest rate cuts, could strengthen the US dollar and weaken gold. Conversely, a dovish approach, such as continuing current interest rates, could support gold prices.
The value of the Japanese yen against the US dollar also affects the price of gold. A strengthening yen could lead to lower gold prices, while a weakening yen could support higher gold prices.
Another factor that could impact the gold market is a rotation towards other precious metals. With the performance gap between gold and metals like gold, investors and jewelers could begin to shift demand from gold to these undervalued alternatives. This shift could limit further gold price gains.
A strong rally in the US dollar, driven by an unexpected improvement in the US fiscal position, could also undermine gold’s appeal as a hedge against currency depreciation. However, given the current political climate in the US, such an outcome seems unlikely.
Finally, high gold prices may prompt private investors to liquidate their gold holdings. In countries like India, where private gold reserves are significant, this could increase supply and put downward pressure on prices. However, it is also possible that these investors would prefer to sell other assets, such as stocks, instead of their gold.
