DE-GLOBALISATION, ASSERTIVE WHITE HOUSE & DUAL MANDATE FED KEEPING GOLD BID

By BART MELEK, Managing Director & Global Head Of Commodity Strategy, TD Securities

While physical flows to the US slow and may even start to reverse, and specs reduce long exposure amid mixed signals coming from the White House, the fundamentals underpinning a bullish gold outlook continue to be firmly in place. These include a Fed that seems ready to ease policy to satisfy its maximum employment mandate under the Federal Reserve Act, even as inflation is trending higher, and concerns the US may face challenges in funding its debt under America’s new tariff regime. Worries that Europe may issue trillions of Eurobonds, which will compete with the Treasury market for global investors who now have less USD available from trade, and China’s use of soft and economic power to grow its trade and geopolitical footprints without the US, are additional factors why investors are set to look to gold.
These, along with ongoing robust official sector and Asian ETF purchasing, and the eventual catchup buying by discretionary traders in the Western world, who currently are underexposed due to their concerns the yellow metal is overbought based on technical indicators and expensive to carry, are all set to play a very important role in driving gold to new highs. We project the average price to hit a record $3,550/oz in Q4 2025.

Gold recently touched a record high of $3,500/oz, as traders placed bids in response to a risk-off environment, no sign that the US tariff plan is going away anytime soon and concern the Fed’s intended tilt toward a maximum employment policy will be expedited and augmented by an interventionist White House. While the metal is off its highs, we expect average price to reach a new record of $3,550/oz in the final three months of 2025, as Fed eases, inflation trends higher, official sector keeps buying and discretionary funds position long.

Tariff Dynamics, Fed's Sanguine Attitude Toward Inflation Sends Gold to New Highs

Gold surged as it looked increasingly likely that any deal to remove the tariffs imposed on goods imported from key US trade partners such as Canada, Mexico, China and many others is unlikely to be reached before they have a material negative impact on inflation, economic activity and US employment.

Indeed, the Fed has lifted its 2025 core PCE inflation estimate to 2.8% from 2.5%, with other forecasters calling for price increases near 4% in the final three months of the year. At the same time, the US central bank signalled that it intends to slow the pace of quantitative tightening and that it will not tighten monetary conditions in response to tariff-driven inflation. The Fed implied that it would likely provide stimulus to fulfil its maximum employment mandate instead, should the slowing economy have a material negative impact on the labour market.

Based on numerous indicators, including signs that retaliatory tariffs from China and others are already hitting manufacturing activity (aerospace being a case in point) and consumer confidence hard, it looks like US employment and the economy may well be in the process of slowing significantly in the coming months. This suggests that the Fed will cut at a time inflation is on the way up.

The Fed’s relaxed attitude toward inflation is a key reason why gold has done so well. As is a president, who is vocally and publicly criticising the Fed chair for not lowering rates. The concern is that the White House may use its executive powers to force rates lower. Even if not successful, any such attempt would send a chill down the spines of Treasury investors.

We have already seen the turmoil in the bond market this year, after a Japanese bank sold US bonds to facilitate liquidity. The questioning of Fed credibility would be accretive for gold, as both the Treasury market and the greenback would be questioned as safe havens.

Fed Chair Jerome Powell’s recent statement that his ‘base case’ is that higher inflation stemming from President Trump’s tariffs will be ‘transitory’ revived memories of how central bank policymakers talked about inflation during the early stages of the COVID-19 pandemic, which proved to be very wrong. Inflation ended up surging to a peak of 9.1% in June 2022, as the Fed accommodated a severe negative supply shock. Tariffs and the resulting supply chain challenges, along with very restrictive US immigration, are self-made negative supply shocks, and monetary accommodation could see stagflation form, which would be good for gold in the current environment.

Gold surged as it looked increasingly likely that any deal to remove the tariffs imposed on goods imported from key US trade partners such as Canada, Mexico, China and many others is unlikely to be reached to prevent an economic and labor market weakening, higher inflation and a robust Fed policy easing.

Indeed, the Fed has lifted its 2025 core PCE inflation estimate to 2.8% from 2.5%, with others calling for price increases near 4% in Q4 2025. At the same time, the US central bank signalled that it intends to slow the pace of quantitative tightening and that it will not tighten monetary conditions in response to tariff-driven inflation. In fact, the Fed implied that it would likely provide stimulus to fulfil its maximum employment mandate instead.

Signs that US tariffs and retaliatory measures coming from China and other nations are already eroding manufacturing activity, consumer confidence and US employment have prompted the market to price several 25 bps cuts this year, while aggregate prices are projected to move materially higher. The Fed’s relaxed attitude toward inflation is a key reason why gold has done so well. As is a President, who is vocally and publicly criticising the Fed chair for not lowering rates and who may use executive powers to force rates lower. Any such attempt, even if not successful, would send a chill down the spines of Treasury investors. We have already seen the turmoil in the bond market this year, after a Japanese bank sold US bonds to facilitate liquidity.

Meanwhile, Fed Chair Jerome Powell’s recent statement that his ‘base case’ is that higher inflation stemming from President Trump’s tariffs will be ‘transitory’ revived memories of how central bank policymakers talked about inflation during the early stages of the COVID-19 pandemic, which proved to be very wrong. Inflation ended up surging to a peak of 9.1% in June 2022. The questioning of Fed credibility would be accretive for gold, as both the Treasury market and the greenback would be questioned as safe havens.

Easy Money, Sky-High Deficits, De-Globalisation and Messy Geopolitics Make Gold a Must

The US debt in April 2025 was estimated to be US$36.22 trillion, some 125% of Gross Domestic Product (GDP) and, according to the Congressional Budget Office (CBO) it will steadily increase over the next 30 years. The Trump administration wants to extend the tax cuts from its previous tenure and introduce new ones, which would see the US deficit likely grow even larger. The CBO estimates that if provisions of the 2017 tax act were extended, debt held by the public would reach 220% of GDP by 2055, 63% higher than the baseline projections. There is also a risk that tariffs and higher-than-expected interest rates may slow the economy and drive deficits much higher than the CBO currently estimates, as there are no serious attempts to cut spending on mandatory components of the budget which compose the bulk of US government outlays. Tariff revenues are unlikely to change the US debt trajectory much.

The concern is that this debt may need to be partially monetised if policy makers want to keep rates from moving significantly higher, as there is little appetite for higher taxes in the US and potentially insufficient demand from global investors to absorb all this paper. Additional competition from trillions of new Eurobond issues, as countries in Europe embrace deficit spending and grow their military footprint, may be an additional reason why all the issued Treasuries may not be easily absorbed. Lower USD holdings from trade with the US in the new tariff environment, may well add to these concerns. If uber-high US tariffs remain, the world may trade around America, reducing the need for greenbacks. Any material USD devaluation would be favourable for gold.

Declining Foreign Investor Appetite to Own Treasuries Increase Monetization Risk

Gold investors and central banks may also worry that US monetary authorities will be pressured by the Trump administration to cut rates, even if inflation is significantly above target. The concerns surrounding Fed credibility are raising speculation that there could be de facto partial monetisation of US debt, which would suppress real yields as inflation runs above target. This has been a driver of official sector and Asian investors buying and may persuade Western discretionary investors (who have not been participants in this rally) to position long.

The price of gold tends to track the marginal cost of production over the long-term, and consequently is a good inflation hedge a labour and productive capital costs rise. In combination with the decline in ore grades across the world, an increased amount of these more expensive factors of production will need to be used to extract the marginal ounce. This suggests that gold may appreciate by more than inflation, making it a superior performer over the long-run.

Gold Still Not at Record in Inflation Adjusted Terms

Official Sector Set to Be Key Gold Driver

In addition to using gold to mitigate the erosion of purchasing power and de-dollarisation, geopolitical stresses have been accretive for the yellow metal. A rise in geopolitical tensions due to the trade war, Middle East tensions and Russia-Ukraine war, as well as continued stresses between the US and China in the South China Sea and over Taiwan, have all served to encourage buying as some central banks diversified away from USD and other fiat currencies. Growing tensions between the US, Iran and some of America’s historic allies also raises the geopolitical risk temperature.

Central banks have been the big buyers, supporting the gold rally recently and for the last several years. Indeed, 2022 saw the official sector which includes central banks buy a record 1,080 tonnes of gold, a near record amount of 1,051 tonnes in 2023 and 1,045 tonnes in 2024. This buying spree coincides with a trend among central banks globally to diversify their holdings to reduce their reliance on the US dollar – a trend that is continuing in 2025.

The People’s Bank of China (PBoC) has been on the forefront of this activity – as it snapped up the yellow metal for the last two years – with its holdings rising sharply to 2,292 tonnes in March. But that still represents only 6.5% of its US$3.24 trillion FX reserve. There is much more room for China to grow its gold holdings, when compared to the US’ nearly 75% share.

PBoC Restarts Its Drive to Diversify Massive Reserves

The PBoC, and other central banks, may want to protect the purchasing power of their reserves and may want to become less vulnerable to US and EU sanctions as Russia was. Indeed, following a very strong three years of central bank buying, gold continues to be viewed favourably by officials as a reserve asset. According to the World Gold Council 2024 Central Bank Gold Reserves Survey (February-April 2024), 29% of central banks respondents intend to increase their gold reserves in the next twelve months, the highest level observed since the survey started in 2018.

New Record on the Cards

Gold’s new range seems to be $3,000-$4,000. In order for prices to go through that lower bound and to stay below the lower end of the range, it may take a shift in investor attention back to rising US risk asset prices, a view change that the US economy will not weaken, and no rate cuts. But we suspect that the economy will weaken, risk markets may have a difficult time rallying hard, and we expect the US central bank to cut.

Lower interest rates at a time inflation is increasing, relatively less appetite for Treasuries as US debt surges to new records and fears grow that the world will have less need for US dollars given a high tariff environment and the prospect of trillions worth of Eurobond competing for investor capital, all suggest that demand for the yellow metal should firm into 2025. As such, central banks, ETF investors and the under-positioned discretionary traders are expected to place strong bids on gold during that time. As such, we project the average price to hit a record $3,550/oz in the final three months of this year.

Bart Melek has over 20 years’ experience analysing precious metals, base metals, energy, financial markets, as well as key economies. He has worked closely with commodity, equity and FX trading desks around the world, and has several forecasting distinctions and top global rankings. Bart contributes to the TD Securities strategic view on commodity, various other markets and macroeconomics. Bart is also a sought-after media commentator. Before joining TD, he held senior roles in equities, commodities and risk.