Gold demonstrated exceptional price performance in 2024 and delivered attractive returns to investors. A strident rise of over 25 percent saw the gold price reach a record level of $2,800 per troy ounce by the end of October. This price performance followed significant uncertainties on the geopolitical front, expectations of interest rate cuts, volatile currency movements, and bond yields. The two ongoing wars ensured that the price of the yellow metal carried a good amount of a ‘war risk premium.’

From the record levels of end-October, the metal corrected downward by about 6 percent to trade in the vicinity of $2,650 per ounce by the year-end. This was because of continued dollar strength, anticipated easing of geopolitical tensions, and slowing official Chinese purchases.

As is their wont, gold producers and exporters are not happy with the price correction. The market is home to incurable ‘gold bulls’ who doggedly believe in the metal’s bull-run. No wonder, some reports—including from reputable houses—have predicted that gold will trade above $3,000 per ounce in 2025.

So, where’s gold headed in the first half of 2025? There are tenable reasons to disagree with the bull view. Without a doubt, gold is a safe-haven asset, and its demand rises during uncertain times, including geopolitical tensions.

For 2025, investors have to bear in mind a few critical factors. The US economy is performing well, and its current resilience is well recognized. The US dollar and treasury yields are set to remain relatively strong. The greenback ended 2024 on a strong note, and all indications point to its continued strength well into 2025. The dollar index (DXY) is set to rally, and bond yields may rise.

Actions announced by the US President-elect Donald Trump are sure to have a big market impact in terms of currency value and inflation. If he imposes stiff tariffs as threatened, inflation in the US is unlikely to fall in a hurry. In that event, the Federal Reserve would be cautious in lowering interest rates.

That’s not all. Trump is targeting a 3 percent GDP growth for 2025. If realized, it would buoy the US economy and make the dollar stronger; that, in turn, will put enormous downward pressure on gold, a non-interest yielding asset.

The most critical factor is the Russia-Ukraine war, which has now been going on for more than 1,000 days. There are strong signals that incoming US President Trump may bring the ongoing war to a halt and provide an honorable exit for Russia’s Putin. He would attempt to broker peace—however tenuous—to end the Israel-Hamas conflict too. That will reduce geopolitical tensions and make the safe-haven appeal of gold less attractive.

Central bank purchases are often cited as a major reason for gold’s price surge in 2024. It is true, and there is nothing to suggest that central banks will not buy gold in 2025. What’s important is the role of China.

Gold purchases by the Asian major’s central bank, the People’s Bank of China, had slowed down from May to October 2024. Purchases resumed in November; however, China would be averse to buying gold in large quantities at the current high rates, especially when conditions are turning favorable for a marked price correction. The same goes for central banks of other countries too.

On the physical demand side, high prices have discouraged retail buyers of gold jewelry. Overall, inflation is burning a hole in the pockets of average citizens of large gold-consuming countries like India. Some demand destruction due to high prices is palpable.

Also, driven by a strong dollar, many emerging market currencies—including that of India—are weakening, making gold imports expensive.

Put all this together, and the picture is clear. There is little justification for gold prices to rise to $3,000 per ounce and above. If anything, gold prices are poised for a downward correction. This is because of dollar strength, slowing physical demand, and the widely anticipated easing of geopolitical uncertainty, which may erase the war-risk premium substantially.

Prices may possibly collapse by as much as $250-300 per ounce from the current levels over the next 3-4 months. When this plays out, less-committed speculative capital will be the first to exit the gold market, which will, in turn, put further downward pressure on prices. 2024 saw outflows from gold ETFs (exchange-traded funds), and this may continue in 2025 as well.

If there is a directional change to gold prices, it would most likely be to the downside rather than to the upside. This is the current and emerging situation. But markets are unpredictable. If fiscal concerns take precedence and central bankers begin to make larger purchases, the yellow metal may receive a boost. On current reckoning, gold is likely to move in a broad range, say $2,400 to the downside and $2,800 to the upside. Trading in gold demands caution.

A weak rupee—upwards of Rs 85 to a dollar—will make gold imports much more expensive and may not allow the Indian consumer to enjoy the full benefit of a correction in the dollar price.

There’s another wild card. This writer believes that in the upcoming Union Budget, customs duty on gold may be hiked from the current 6 percent ad valorem to, say, 9 or 10 percent. The last Union Budget, presented in July 2024, provided a massive duty relief from 15 percent down to 6 percent, which entailed a significant revenue sacrifice.

Given the tightening fiscal position, policymakers would be keen to maximize revenue in the upcoming Budget. A duty hike will make gold more expensive within India.

(G. Chandrashekhar is an economist, senior journalist, and policy commentator. He is an Independent Director on corporate boards and serves as an Independent Member of SEBI – CDAC. He has no trading interest. Views are personal.)