Gold hit new highs during the month

Dollar weakness and ETF flows fuel gold 

Recently, World Gold Council released their Gold Market Commentary for the month of February 2025. The Commentary reviewed the February; Gold hit new highs during the month, supported by a weaker US dollar, extending its y-t-d gains to 9%. 

Gold continued its uptrend in February, hitting multiple new highs before pulling back to end the month at US$2,835/oz – up 0.8% m/m.1 This performance was echoed across major currencies, all of which also registered new record highs. General interest in gold was bolstered by continued flows of gold into COMEX inventories, driven by continued tariff uncertainty. 

According to our Gold Return Attribution Model (GRAM), US dollar weakness during the month was one of the primary drivers of gold’s performance, alongside an increase in geopolitical risk and a drop in interest rates. And while gold’s strong price appreciation in January created a small drag, it was counterbalanced by positive support from flight-to-quality flows. 

This was best illustrated by gold ETF activity, which saw massive net inflows of US$9.4bn (100t) – the strongest month since March 2022 – led by US- and Asian-listed funds.

From the reassessing risk and reward, 1: The Trump trade –stronger dollar and US stocks has taken a back seat amidst concerns about tariffs and hawkish foreign policies, conditions that will likely remain, 2: As governments look to increase military spending, budgets deficits are likely to increase and credit ratings to fall. 

3: At the same time, despite inflationary pressures, markets expect a more dovish Fed, pricing in at least two full rate cuts by the end of the year & 4:These factors combined are creating a particularly supportive environment for gold.  

Risk-off in, risk-on out; the Trump trade - which hinged on the pro-US growth agenda of the new administration and fuelled a dollar and stock rally post US election – appears to have faded. While European stocks continue to do well, the major beneficiaries have been risk-off assets such as US Treasuries and gold.  

Inflation is bubbling up; trump‘s campaign agenda hinged on a few key items, including: tariffs, immigration and tax cuts2 – all of which have the potential to flare up inflation. However, assessing the economic impact of tariffs is not straightforward: while they might be inflationary in a very strong economy, they could lower spending in a weaker one. 

And there are already signs that consumer sentiment in the US is beginning to falter: the University of Michigan consumer and expectation surveys are at their lowest level since 2023. Lower levels of immigration (and higher deportations) will likely lead to higher labour costs, although the strength of the labour market is key to determine its full effect.  

Nominal wages in the US are currently plateauing while potential large-scale Federal layoffs could increase labour supply. However, those workers are unlikely to fill the spaces left by immigration. Tax cuts for businesses and the wealthy will boost growth and inflation. However, any anticipated boost from tax cuts has yet to materialise as they may take ‘months to negotiate’.  

While January inflation data generally runs hot, policymakers at the Fed seem content with the progress that has been made so far. At the same time, elevated uncertainty was heavily cited in the last meeting minutes, whether through tariffs, immigration or domestic policy, such as potential large-scale Federal layoffs, a nod to the Fed’s dual mandate of price stability and full employment.

What’s more, US Treasury Secretary Bessent’s comments that they are focused on bringing down the 10-year yield has also served to ease conditions somewhat.

New world (dis)order? Negotiations to end the Russia-Ukraine war have led to much handwringing and consternation, particularly across Europe during February. 

This has compounded already elevated geopolitical uncertainty as positive outcomes are by no means guaranteed and existing political alliances are being questioned.  

Speculation that Europe will need to ramp up defense spending going forward – resulting in larger deficits – has already pushed up borrowing costs. Yield curves on European sovereign debt have become increasingly steep; short-term rates are falling while long-term rates remain high as expectations grow for an increased supply of long-dated debt. 

The UK has already committed to increase defense funding,8 and Germany’s future chancellor, Friedrich Merz, has begun discussions on the topic. For the latter, this could be further complicated by the potential need to rely on the support of fringe parties after a somewhat mixed election outcome.  

The performance of the European defence sector, one of the best this year, is reflecting the likely continuation of this trend. Should a resolution to the Russia-Ukraine war be found – and importantly, this will need to be one agreeable to all parties – this could dampen any geopolitical risk premium in gold. But it remains to be seen whether real progress can be made and, if so, what the implications will be. Until then, it is likely that gold will remain well supported.