Gold Shines Amid PCE Data

Gold (XAU) rose 1.2% on Friday, 20 December, as weaker-than-expected PCE inflation revived the odds of a more accommodative policy in 2025 following the Federal Reserve's hawkish hold last week. Personal income and spending figures also came in lower than expected, weighing on the dollar (DX).

Easing inflation expectations for 2025 and 2029, according to the University of Michigan, coupled with dovish speak, boosted Treasury notes, adding to the declines in a dollar that had witnessed strength in the wake of a less dovish FOMC on the 18 of December. 

Following the data releases, markets are pricing in slightly more chances of rate cuts.

Meanwhile, President-elect Donald Trump warned the European Union of tariffs on Friday, urging the region to increase its energy purchases as it phases out Russian imports. Trump’s threat of imposing tariffs when he takes over the reins in the US also impacted gold and silver (XAG) in the form of fear.

As we approach the Chinese New Year, a period of heavy gold-buying activity, the 29 January mark will commence the Year of the Snake, which saw gold plummet around 30% when last observed in 2013. Yet, whether history repeats itself remains to be seen, as past performance does not guarantee future results. Goldman Sachs (GS) still expects worldwide tariffs and significantly larger rate cuts to feed into commodity prices.

PCE and Trump Warning Fuel Gold Rally

The weakness in the US dollar came on the heels of core PCE inflation, the reading the Fed follows for policymaking, stalling at 2.8% year-on-year in November after a similar print in October. Coupled with the slowest monthly rise of 0.1% seen since May to 2.4% year-on-year from 2.3% previously, the dollar fell. However, it was the combination of PCE and Consumer Spending that weighed on sentiment, as the latter missed economist estimates of 0.5%, coming in at 0.4%. Consumer Spending accounts for over two-thirds of economic activity in the US, which is largely responsible for GDP growth. The Fed cited strong GDP growth as one of the reasons for signalling only two rate cuts in 2025 instead of the four expected previously. The Fed’s dot plot also reflected rising uncertainty stemming from potential Trump tariffs. (Source: Reuters)

In other US data also released Friday, the University of Michigan (UOM) inflation expectations supported the disinflation narrative stemming from the PCE release, which was partially fueled by dovish speak. On the one hand, UOM inflation expectations for the 1- and 5-year timelines declined to 2.8% and 3% from 2.9% and 3.1% previously, with sentiment improving as inflation slows down but remaining low. On the other hand, policymakers Williams and Golsbee struck a dovish tone in recent talk. Williams cheered a stronger economy but suggested a real neutral rate of around 0.75% compared to the 1% the Fed anticipates, while Goolsbee noted that rates must decline to neutral in 2025.

Key Risks and Outlook for 2025

Despite gold prices rising on Friday, the yellow metal still recorded a weekly loss following the Fed’s hawkish rate cut last Wednesday. As the Fed signalled slower rate cuts in 2025 and a higher interest rate environment overall, traders had started to price in just one rate cut before the PCE report. Better economic projections and hotter inflation have stoked fears, with Wall Street’s fear gauge spiking to 60% after Powell signalled no imminent rate cuts. The Fed’s data-driven approach adds significance to impending labour market data and fiscal risks under the upcoming Trump administration.

Aside from recent warnings to the EU, Trump has also announced potential tariffs on products from Mexico, Canada, and China. These tariffs would negatively impact the commodities markets from a demand perspective, feed into inflation, and further disrupt the process of disinflation and policy easing by major central banks. However, the potential for supply disruption, especially should Trump impose a 10% tariff on physical gold imports, could boost spot gold prices by around $300 per ounce.

Goldman expects the Trump administration to increase China and auto tariffs, reduce immigration, and cut taxes. These measures support a modestly higher dollar but, most importantly, sustain US growth while maintaining the Fed’s dovish narrative. Goldman’s macro outlook, however, marks broader tariffs as the biggest threat to US growth. (Source: Goldman Sachs)

The PCE drop has already increased demand for gold from the world’s largest importer, China, with safe-haven demand and rate cuts supporting the thesis for more upside to $2,760 per ounce in 2025. In fact, China’s stimulus measures are also expected to have a positive effect on gold prices despite the Year of the Snake not being considered a positive year for weddings.

Conclusion

As easing inflation expectations and slightly shifting rate cut odds bolster the yellow metal, uncertainties surrounding Trump’s tariff threats and global fiscal risks add complexity to the gold’s 2025 outlook. With the Chinese New Year approaching and safe-haven demand somewhat on the rise, gold’s course of action in 2025 hinges on a balance of upcoming GDP, inflation and labour data in the US, rate cut narratives across the globe and geopolitical developments. However, whether history repeats itself during a pessimistic Year of the Snake in China, the largest importer of gold remains to be seen whether analysts are wrong.