Gold kicked off the year with a strong rally, recently reaching all-time highs of $2,940 per ounce. With some analysts eyeing a potential move toward $3,000 by March, what’s driving this surge, can it last, and what does it mean for emerging markets (EM) debt investors?
Gold’s Upward Trajectory
What’s fueling gold’s momentum?
The rally began early last year with expectations of rate cuts, later confirmed by the U.S. Federal Reserve (Fed), Bank of England, and European Central Bank starting in mid-2024.
Geopolitical and economic risks have also played a key role. The 2024 U.S. presidential election added uncertainty, followed by trade tensions with Mexico, Canada, and China, including retaliatory tariffs. Meanwhile, the Russia-Ukraine war remains a flashpoint, with the United States and Russia negotiating a ceasefire without Ukraine or the EU at the table.
In times of uncertainty, gold thrives.
How High Could Gold Go?
Some analysts believe gold could hit $3,000 by March—but how likely is that?
With prices already near $2,940, the odds seem strong. Economic uncertainty, trade tensions, and geopolitical risks could drive further safe-haven demand. A downturn in U.S. economic data could also push prices higher, as investors seek protection.
A move to $3,000 now seems more likely than not.
Central banks remain a key force in the gold market. Since 2022, they have ramped up purchases despite high prices. The People’s Bank of China, one of the largest buyers, resumed gold acquisitions in November.
Given these factors, a move to $3,000 now seems more likely than not.
Is the Rally Sustainable?
Gold’s current levels could lead to a pullback, particularly due to weakening physical demand. Jewelry, which accounts for about half of total gold demand, tends to decline when prices rise too high.
As the saying goes, “the cure for high prices is high prices”—a reality that often holds true for commodities, including gold.
While investor demand may remain strong, a slowdown in broader demand could weigh on prices. In addition, a stronger U.S. dollar, driven by economic factors, could add pressure, making it harder for gold to sustain a fresh rally from current levels.
Understanding the Opportunities
High gold prices are making gold producers, particularly in EMs, more attractive. These markets account for over 70% of global gold production, and many gold companies are seeing improving fundamentals. Higher prices enable them to invest in growth projects and even return capital to shareholders through dividends.
We believe other precious metals could benefit as well.
Beyond gold, we believe other precious metals could benefit as well. Silver and platinum group metals (PGMs), especially platinum, have already shown signs of a sympathy rally, supported by strong fundamentals.
Considering the Risks
The key question is, could gold now be considered overvalued?
Gold at $3,000 could indeed be viewed as overvalued, especially if high prices start disrupting demand. Jewelry demand may decline, and central banks—strategic buyers of gold—could hold off on purchases until a potential correction in prices. While some have continued buying at elevated levels, it remains uncertain if that trend will persist.
A move past $3,000 might trigger profit-taking, though any correction could present a buying opportunity, particularly in this macro environment. A broader improvement in sentiment or a resolution of geopolitical tensions could also pressure prices lower.
We’re always cautious when we see commodity prices soar too high too soon, and when undertaking fundamental analysis, we look at gold companies carefully.
But the question of whether to hedge against uncertainty or wait for a pullback depends on each investor’s strategy and current positioning. What is important right now—to hedge geopolitical risk or potentially benefit from further price depreciation in gold? Given current levels, betting on further price depreciation could be challenging.
Factors to Watch
We’ll also be looking for other factors that could move gold prices in the coming weeks. Key market drivers to watch include ceasefire negotiations in the Russia-Ukraine war and rising trade tensions. If sentiment weakens, gold could benefit.
Escalating tariffs could be a further catalyst for gold.
Escalating tariffs are also inflationary, and inflation increases economic risks, so that could be a further catalyst for gold.
In addition, U.S. economic data and the dollar’s strength remain crucial. While gold and the dollar often move inversely, that correlation has been inconsistent over the past year, meaning a stronger dollar could still weigh on gold at these levels.
A Final Word
Gold’s role as a safe-haven asset is unique, but at $3,000, its appeal for new allocations may weaken. Higher prices increase downside risk, making further buying less compelling. As prices increase, the gold’s value increases in a portfolio as well, weakening the argument for further buying.
Instead, investors may look to other precious metals, such as silver and platinum, which have strong fundamentals and diversified demand sources.
Alexandra Symeonidi, CFA, is a senior corporate credit and sustainability analyst on William Blair’s emerging markets debt team.
