What could stop this bull market in gold? Via Investing.com

Investing.com — The market has seen significant price growth, with gains of 21% in 2024 and 32% in the past year. This strong performance positioned gold as one of the few major asset classes to hit new all-time highs.

While other commodities, including precious metals such as silver and platinum, struggled, they saw significant declines.

Unlike previous gold bull markets, this rally is taking place under unique circumstances, raising the question of what factors could halt its upward trajectory.

To understand what could disrupt this bull market, it is essential to first understand the factors driving gold prices higher. Analysts at Gavekal Research have identified several key factors that distinguish this market from its predecessors.

One of the main factors is geopolitical tension. Freezing Russia’s foreign reserves in 2022 has made Western bonds less attractive to non-democracies. As a result, gold has become a more attractive alternative for central banks.

Added to this is the problem of ballooning budget deficits in major economies such as the US, UK and France. The pandemic has exacerbated these fiscal deficits, and they have remained stubbornly high.

“Fiscal deficits have risen across the board during the pandemic, but have remained stubbornly high in the US, UK and France, which must worry any long-term investor,” the analysts said.

The current political climate in the US is also helping gold rise. The ongoing election cycle is creating anxiety among investors as both major political parties propose policies that could further destabilize the economy.

Proposals for tariff hikes, price controls and heavy subsidies are seen as potential triggers for economic mismanagement, prompting investors to turn to gold as a hedge.

Meanwhile, emerging market demand 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 devaluation, government spending or even geopolitical conflicts, 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 base supporting gold’s current rally, several factors could halt or reverse this trend.

A possible risk is a decline in economic dynamics in emerging markets. A sharp decline in trade or growth in these regions could weaken demand for gold.

However, given the current strength of trade surpluses and economic stability in these regions, this scenario seems unlikely in the near term.

Another potential disruptor to the gold market could be the discovery of new large-scale gold deposits. An increased supply from such discoveries could lower prices. However, the gold mining industry is currently struggling to find new deposits, making this scenario unlikely.

A collapse in energy prices could also affect the gold market. Lower energy costs would reduce gold mining operating expenses, potentially increasing production and lowering prices. However, there is little indication that energy prices will collapse anytime soon.

Federal Reserve monetary policy plays a critical role in influencing gold prices. A more dovish stance, such as delaying interest rate cuts, could strengthen the US dollar and weaken gold. Conversely, a hawkish approach, such as keeping interest rates current, can support gold prices.

The value of the Japanese yen against the US dollar also influences gold prices. A strengthening yen could lead to lower gold prices, while a weaker yen can support higher gold prices.

Another factor that could affect the gold market is a rotation to other precious metals. With the performance gap between gold and metals such as , investors and jewelers may begin to shift demand from gold to these undervalued alternatives. This shift could limit further gains in gold prices.

A strong rise in the US dollar, driven by an unexpected improvement in the US fiscal situation, could also undermine gold’s appeal as a hedge against currency devaluation. However, given the current US political environment, such an outcome seems unlikely.

Finally, high gold prices could encourage retail investors to liquidate their gold holdings. In countries like India, where private gold holdings are significant, this could increase supply and put downward pressure on prices. However, it is also possible that these investors prefer to sell other assets, such as stocks, instead of their gold.