Three macro factors supporting a bullish outlook for Gold

After setting a record just over $3,500 an ounce in April, gold has consolidated and traded sideways since, and there is some bearish sentiment seeping into the market.

Last week, Citigroup lowered its gold forecast, projecting the yellow metal would fall below $3,000 by the end of the year.

Citi analysts cited easing geopolitical tensions, diminishing gold’s safe-haven appeal. They also hold a relatively sanguine outlook on the direction of the economy, saying there is a growing sense that it can avoid a recession and that inflationary pressures will remain contained.

“We see investment demand for gold abating in late 2025 and 2026, as ultimately, we see President Trump's popularity and U.S. growth 'put' kicking in, especially as the U.S. midterms come into focus."

Much of Citi’s optimism seems to hinge on a resolution of the trade war. Tariff worries have driven both higher inflation expectations and worries about a looming recession. It is quite possible that President Trump could successfully negotiate an end to excessively high tariffs. That seems to be the strategy. But would an end to trade tensions necessarily abate inflation and recession fears?

Despite some growing bearish sentiment, there are at least three macroeconomic factors that should continue to support the gold market moving forward.

De-dollarization

There is a growing movement around the world to diversify reserves away from the dollar. A combination of the weaponization of the dollar as a foreign policy tool and concern about the U.S. government’s fiscal mismanagement is driving this trend.

The dollar’s share of global reserve currencies slid further last year. As of the end of 2024, dollars made up 57.8 percent of global reserves. That is the lowest level since 1994, representing a 7.3 percent decline over the last decade. In 2002, dollars accounted for about 72 percent of total reserves.

As the dollar’s share of reserves shrinks, gold’s is increasing. The yellow metal recently replaced the euro as the second-largest global reserve asset.

This de-dollarization trend is reflected in central bank gold buying, which has been a major source of support for the recent gold bull market.

Central banks have gobbled up over 1,000 tonnes of gold for three straight years, and most central bankers think the buying trend will continue.

Last year was the third-largest expansion of central bank gold reserves on record, coming in just 6.2 tonnes lower than in 2023 and 91 tonnes lower than the all-time high set in 2022. (1,136 tonnes). 2022 was the highest level of net purchases on record, dating back to 1950, including since the suspension of dollar convertibility into gold in 1971.

To put that into context, central bank gold reserves increased by an average of just 473 tonnes annually between 2010 and 2021.

There is no indication that central banks will stop adding gold any time soon.

In a recent World Gold Council survey, 95 percent of 73 central bank respondents indicated they believe central bank gold reserves will increase over the next 12 months. A record 43 percent of the respondents indicated they expect their own gold reserves to expand. That was up from 29 percent in 2024.

Reserve diversification will likely continue to support gold, and it may well accelerate as it becomes more evident that the U.S. is unwilling to take the steps necessary to get its fiscal house in order.

Inflation

Despite cooling price inflation as reflected by the CPI, monetary inflation (properly defined) is increasing. Keep in mind that price inflation is just one symptom of the increase in the supply of money and credit.

And monetary inflation has been heating up for more than a year.

During the pandemic, the M2 money supply surged by roughly $6 trillion as the Federal Reserve unleashed massive monetary stimulus. That led to the bout of price inflation we suffered through in 2022.

During the Fed’s inflation fight, the M2 money supply contracted. This is exactly what needs to happen to wring out inflation from the economy. The money supply bottomed a little over a year ago at $20.60 trillion.

Since then, it has crept upward.

As of April, it was at $21.86 trillion. That’s the highest level since June 2022 and approaching the all-time high of $21.72 trillion hit in the spring of that year.

Eventually, this monetary expansion will begin to show up in rising consumer and asset prices.

That means investors will need to maintain an inflation hedge.

It’s also important to keep in mind that inflation isn’t an accident. It’s the policy. The Federal Reserve constantly devalues the dollar. The central bank isn’t trying to end inflation. It just wants to keep it at a level that you don’t notice.

Wise investors should always be aware of the inflationary pressures in the economy, even when everybody claims inflation is dead because of the CPI.

The bottom line is that while we have a reprieve, inflation will almost certainly rear its ugly head again – with or without tariffs. In fact, the Fed never did enough to slay the inflation dragon to begin with.

Recession worries

Most mainstream analysts seem to think a resolution of the tariff situation will prevent the economy from spinning into a recession. However, we still haven’t reckoned with the monetary malfeasance of the Great Recession and the pandemic.

After the 2008 financial crisis, the Fed launched an era of easy money that lasted well over a decade. This resulted in a stimulus-fueled economic and market boom. The bust was looming in 2018, and the central bank was forced to cut interest rates and relaunch quantitative easing in 2019, a full year before COVID-19 reared its ugly head. The pandemic gave the central bank and the federal government a reprieve, allowing them to double down on the monetary and fiscal stimulus. But that just blew the boom bubble even bigger.

Don’t forget, every boom comes with a corresponding bust. We haven’t reckoned with that yet, and we’re due.

The U.S. economy is buried in debt and riddled with malinvestments. It is basically a bubble in search of a pin. At some point, the bubble will pop, and we will experience the inevitable bust.

Just because we haven’t suffered the consequences of this monetary malfeasance yet doesn’t mean we won’t. Keep in mind that the Federal Reserve started cutting rates in 2006. It took some two years for the collapse to finally manifest.

When the bottom does fall out, the central bank will almost certainly try to reinflate the bubbles with rate cuts to zero and more quantitative easing.

That brings us back to the inflation issue.

It also underscores the fact that the Fed is currently stuck between a rock and a hard place. It needs to keep interest rates higher to keep price inflation at bay. It also needs to cut rates to support the bubble economy.

It can’t do both.

While gold may see some selling pressure in the near term, these factors support a mid to long-term bullish outlook for gold.  

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