The gold price slipped 0.7% lower in December, largely a result of the Fed’s hawkish statement following its 25 basis-point rate cut
The US Dollar and Treasury bond yields both rose on the Fed’s revised outlook for inflation and interest rates, which negatively impacted the price of gold
Gold returned 27.2% in 2024, making it one of the year’s best-performing assets and marking the best year for gold since 2010
One of the best-ever years for gold ended with the second straight monthly decline, with the price down 0.7% in December. Gold was higher in the first part of the month but moved lower after the Fed reduced its expected interest rate cuts. Gold finished 2024 at US$2,624 for an annual return of 27.2%, marking its best annual performance since 2010 when the price rose by 27.7%.
Source: Bloomberg, as at 2 January 2025. Past performance does not predict future returns.
The gold price had moved higher in the first half of the month, with the People’s Bank of China (PBoC) reporting it had bought gold in November after a six-month hiatus. PBoC had been one of the biggest central bank buyers of gold in in the previous 18 months, so a return to the market could be significant heading into 2025. Gold was also boosted by further uncertainty in the Middle East after the overthrow of Bashar al-Assad’s regime leaves Syria unsettled until new leadership is established.
The tide turned after the Fed’s December meeting. The central bank’s 25 basis point rate cut was widely expected, but Chair Powell suggested the Fed would be taking a more cautious stance going forward, with “the extent and timing of additional adjustments” dependent on “incoming data, the evolving outlook and the balance of risks”. Fed committee members have raised their inflation forecast while reducing their expectations for interest rate cuts in 2025. This hawkish outlook served to strengthen the US Dollar and saw bond yields rise, both negatively impacting the gold price.
Source: Bloomberg, as at 2 January 2025. Generic Inflation Index US 10-year government bond or real yield on generic 10-year TIPS (TIPS = Treasury Inflation Protected Security).
US Treasury yields rose in December, leading up to and then accelerating after the Fed meeting. The market is pricing in the prospects of fewer interest rate cuts in 2025 and the possibility of a pause while the central bank assesses the progress on inflation and employment. The median forecast of Fed committee members is for 50 basis points of cuts in 2025 and another 50 in 2026.
The progress of inflation will be key to the committee’s policy decisions, possibly the most important consideration assuming employment conditions remain within acceptable boundaries to meet the second part of its mandate. US CPI for November was 2.7% on an annual basis, up from 2.6% in October but in line with market expectations. The increase was partly due to shelter costs, which remains one of the most stubborn components. Core inflation at 3.3% was also as expected.
Source: Bloomberg, as at 2 January 2025.
The US Dollar continued to strengthen versus other major currencies, with the DXY index ending December 2.6% higher, reaching its highest level since November 2022. Compared to the Fed’s hawkish rate cut, actions by some other central banks underpinned the exchange rate differentials of those currencies versus the USD.
The ECB cut rates for the fourth time in 2024. The ECB has already reduced rates by 100 basis points this year, to 3% at its December meeting, and the market expects it to reach 2% by July 2025. The Swiss National Bank and Bank of Canada both reduced rates by 50 basis points.
The Bank of Japan left rates unchanged in December, weakening the Yen versus the USD, but is expected to raise rates again possibly as soon as at its January meeting.
Keep an eye on …
The next few reports out of the US on inflation and employment could help the market understand where the Fed goes from here, particularly after Chair Powell’s comments in December. The minutes of that meeting could also provide insight in the members’ concerns ahead of the rate cut. Economic data from other countries will also be worth watching as their central banks decide on interest rates, especially as they also consider the impact of possible trade tariffs on their domestic economies.
Trump begins his second term on 20 January and while he is almost certain to issue selected executive orders on day one, few if any should come as a surprise or have a meaningful impact on the market. Monitor the progression on tariff and trade discussions that will follow.
Also keep an eye on central bank gold buying and the attraction to investors in general who may have been looking to add gold to their portfolios when prices dipped.
In December, bond markets generally performed poorly, driven by rising government bond yields as economic data showed the US economy's resilience, leading to a more hawkish outlook from the Federal Reserve. Read our latest thoughts on how fixed income markets performed during the month and what we think you should be looking out for in the near term.
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Data as at 2 January 2025 unless otherwise stated. Source: Bloomberg.
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