ClockWise: Gold as a geopolitics hedge, inflation hedge and US dollar hedge

There are few major assets that have been trading as well as gold so far in 2025. Having returned over 10% year-to-date, gold has outperformed global equities, global bonds and also the broader commodity index, and is rapidly making its way towards the $3,000 an ounce mark (Chart 1).

We have held a positive view on the asset since last July and previously covered the drivers behind the current bull-run in our ClockWise blog in October, focusing on central bank purchases, gold’s inflation-hedging properties and troughing ETF holdings.

Chart 1: Year to date performance of gold versus major asset classes

Source: LSEG Datastream as at 14 February 2025. Gold spot returns in USD shown for gold, MSCI All-Country World index total return in local currency for global stocks, Bloomberg Global Aggregate index total return hedged to GBP for global bonds and Bloomberg Commodity index total return in USD for commodities.

Central bank demand for gold was strong again in 2024, with net purchases across the globe coming in above 1,000 metric tons for the third consecutive year (Chart 2). Central banks have stepped up their purchases significantly over recent years, in what looks to be an effort to diversify their reserves in the increasingly uncertain geopolitical backdrop.

This recent interest has been led by emerging market countries, initially sparked when Western countries took coordinated action to freeze the Russian central bank’s assets in response to the Russian invasion of Ukraine in February 2022.

Last year’s net purchases were led by the National Bank of Poland, with their Governor announcing plans to increase the country’s FX reserves held in gold to 20%. Turkey and India took the next two spots on the podium, with China close by in fifth spot, having been the largest gatherer the year before. Relatively high demand compared to historical norms could stay with us for some time; according to the latest survey from World Gold Council, more than two thirds of global central banks surveyed expect the proportion of their total reserves denominated in gold to be higher five years from now.

Relatively high demand compared to historical norms could stay with us for some time; according to the latest survey from World Gold Council, more than two thirds of global central banks surveyed expect the proportion of their total reserves denominated in gold to be higher five years from now.

Chart 2: Global central bank net gold purchases (metric tonnes)

Source: Bloomberg, World Gold Council as at 31 December 2024.

We are not surprised that gold prices have continued to rally over the last few months. In an environment where risk of inflationary pressures is high, bonds may be seen as a poor hedge for risk assets and many investors are turning to gold to defend them against uncertainty. Recent months of strong performance may also be driven by an element of seasonality.

Consumer demand for gold has a clear seasonal pattern that is driven by the behaviours of the two largest gold consuming nations, China and India. Seasonal demand usually starts to pick up in August around the Qixi Festival (Chinese Valentine’s Day) and peaks around the Chinese New Year. This partly coincides with the Indian wedding season from October to February, adding further upside pressure to gold prices.

As seen below, most of gold’s historical gains have occurred during the period of August to February, with an average return of 10.5% from 1973 to 2024, compared to the March to July period that has seen gold prices gain an average of only 1.1% (Chart 3).

Chart 3: Average historical changes in gold prices

Source: LSEG Datastream as at 31 December 2024. Gold spot price data in USD from 1973 to 2024.

Positioning in the futures market is not yet looking overly stretched, and ETF flows are not flashing warning signs either. Central bank buying should continue to support price moves higher from here.

Despite this seasonally positive period for gold performance coming to an end, we continue to hold a positive view on the asset. We are aware that prices have risen to all-time highs and may be pricing in much of the geopolitical uncertainty already. However, in our view, the asset remains a great diversifier against potential bouts of volatility in equity markets. Positioning in the futures market is not yet looking overly stretched, and ETF flows are not flashing warning signs either. We also believe that central bank buying should continue to support price moves higher from here.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.