BOA on Gold and Silver: Tug of War in 2025
Trump's Policies versus China Demand
Housekeeping: Good Afternoon.
Contents: (1500 words)
Gold: BRICS Big Picture Meets US Macro Policy-Change
American Investor Behavior
Real Rates and Fiscal Pain
Policy Impacts on Gold
But Debt is a Global Problem
Bottom Line: Shorts Licking Wounds
Silver: US Supply Meets China Demand
Market Deficits Persist
China Premium is No Joke
Technological Cost-Cutting
Gold/Silver ratio to fall by another 10 points
Bottom Line: If Trump Acts, China Must React
BOA’s Year Ahead 2025: Commodity Outlook Summary
Tariffs, weak EMs cast bearish cloud on commodities
US gas may outpace oil as metals remain rangebound
Modest total returns ahead, but diversification may hold
Gold: BRICS Big Picture Meets US Macro Policy-Change
Gold prices, which stabilized at approximately $2,700 per ounce by late 2024, faced downward pressure following the U.S. election results. The report attributes this to expectations of higher interest rates, a strengthening dollar, and diminished demand from emerging market (EM) central banks grappling with currency devaluation from rising tariffs.
Despite these headwinds, the analysis identifies bullish undertones, driven by escalating global debt and inflation concerns. As the Bank notes, “the interplay of debt, wars, and inflation will likely bring buyers back to gold.”
American Investor Behavior
Investor demand has been inconsistent. For example, Chinese gold imports, a significant driver in early 2024, fell to multi-year lows mid-year before rebounding in autumn. Concurrently, China’s domestic gold prices have traded at a discount to global markets, reflecting weaker domestic sentiment (Exhibit 204). These regional disparities in demand underscore the complex drivers of gold prices, suggesting a mixed outlook heading into 2025.
Real Rates and Fiscal Pain
Gold’s traditional inverse relationship with interest rates has been volatile to say the least. While rising rates typically suppress gold prices, the report ( and we) argues that structural fiscal challenges—such as mounting U.S. debt and elevated debt-servicing costs—could provide countervailing support. “Even with rising rates, fiscal unsustainability keeps gold an attractive safe-haven asset,” the report asserts.
Policy Impacts on Gold
The analysis identifies four key policy areas under the incoming administration that may ( or may not) weigh on gold:
Deregulation: Expected to bolster economic growth and push rates higher.
Fiscal Policy: Proposed tax cuts could amplify short-term growth but elevate inflation risks.
Tariffs: Increased trade barriers may suppress EM central bank demand for gold.
Fed Policy: A potential pause in rate cuts may temper inflation expectations and gold demand.
These policies collectively pose challenges for gold, as reflected in the report’s assertion: “A stronger dollar and higher growth could limit the appetite for gold investments.”
But Debt is a Global Problem
That said, BOA is still concerned about an uncertain macro environment and also the fiscal outlook. The dire fiscal trajectory was highlighted in a recent study by the Committee for a Responsible Federal Budget, which outlined that the upcoming administration will face an unprecedented fiscal situation upon taking office.
The national debt is projected to reach a new record high as a share of the economy only three years from now, well within the next presidential term (Exhibit 206). Incidentally, it is not just the US where fiscal spending is shooting up. Exhibit 207 and Exhibit 208 analyse spending plans in advanced economies, highlighting that many platforms are in favour of fiscal expansion. The trend behind that data is even more striking, with expensive spending promises trending higher in recent years.
Linked to that, central banks remain large holders of government bonds, and the fiscal outlook provides a strong incentive to further diversify reserves and add gold, which has been a popular trade, as Exhibit 209 shows. Encouragingly, central bank gold holdings are still well off the ratios required to optimize risk-return profiles (Exhibit 210)
Bottom Line: Shorts Licking Wounds
Bottom line for Gold is, sideways with some downside volatility expected to return until Q4 next year. The New Year will bring new resolve for Bullion banks who are no doubt licking wounds in 2024
Silver: US Supply Meets China Demand
Market Deficits Persist
Silver markets have been in persistent deficit, a trend that is intensifying as global demand outpaces supply. The report estimates a supply deficit of over 2,300 tonnes for 2025, driven by limited production growth and robust demand from industries like solar photovoltaics (PV) and electric vehicles (EVs). Exhibit 211 highlights this structural imbalance…
China Premium is No Joke
Stronger fundamentals have been mirrored in a range of indicators, with regional silver using markets, for instance, picking up. Prices in China have traded at a premium for most of 2024.
Granted, the backdrop has softened somewhat of late and it may remain weak until there is more clarity on how the trade dispute will evolve. Notwithstanding these short-term obstacles, the backdrop in China has become more constructive, driven both by demand and supply. For more insights on this, see the compnaion video done this morning titled BOA Says Silver’s Turn in 2025
China’s silver consumption has strengthened on rising use from the solar industry, while production has slowed because the country’s smelters face tight global mine supply
Technological Cost-Cutting
The adoption of advanced PV technologies, such as Tunnel Oxide Passivated Contact (TOPCon) and Heterojunction (HJT) cells, is expected to reduce silver loadings per unit of output. As the report observes, “Silver’s role in the energy transition is evolving, with efficiency gains partially offsetting higher demand.”
Exhibit 216 and Exhibit 217 above illustrate solar installation growth and changing market shares of PV technologies, provide critical insights into these trends.
The Gold/Silver ratio to fall by another 10 points
Investors took a more constructive view on gold when the Fed started cutting rates, although the expectations around the pace of monetary easing subsided after the Republican sweep. This has also increased headwinds to silver. That said, silver is more cyclical, so once the dust settles, the white metal should outperform because it is key to the energy transition and also sensitive to manufacturing activity.
Headline manufacturing PMIs have historically been a decent indicator for the direction of the gold:silver ratio, and if global industrial production picks up, the ratio could fall by another 10 points to 75 over the next 18 months.
Bottom Line: If Trump Acts, China Must React
Bottom Line on all of this is, The bank thinks Trump will bring a private industry growth oriented mindset. Which is definitely inflationary, but not so horrible for the dollar with Tariffs if they are implemented. For that reason, if 2024 was the year they wanted the gold, 2025 might be the year they want tthe Silver for industrial purposes. For those tailwinds to manifest, we need one of two things to happen:
Trump to get done what he says he will in the first 100 days
China must then follow up with another fiscal stimulus round soon as the Trump Tariffs are implemented in order to counteract them.
We will be watching the China premium and the London EFP for clues of this manifesting
BOA 2025: Commodity Outlook Summary
Tariffs, weak EMs cast bearish cloud on commodities
The ICE MLCX TR index is up 4% YTD supported by large gains in precious metals and rangebound energy and industrial metals prices, while agricultural commodities have remained a drag on the complex. What will happen in 2025? Our economists see US inflation continuing to slow, with 75bps of additional rate cuts through 2025, but also a strong dollar and a higher terminal rate. Global GDP should expand 3.3% next year, with downside risks coming from tariffs and upside offsets from laxer fiscal policy. A cocktail of tariffs, tax breaks, and deregulation could boost economic activity in America relative to the rest of the world. But given that commodity demand growth is mostly an EM story, the new US policy mix casts a bearish cloud on raw materials. Fundamentals point to oversupplied markets in 2025 for oil and grains, but more finely balanced for metals, setting the stage for rangebound to lower commodity returns next year.
US gas may outpace oil as metals remain rangebound
The threat of tariffs is creating a mini-restocking cycle in 4Q24 ahead of policy action. But global trade tensions may dent industrial activity in 1H25, likely hurting demand for most cyclical commodities such as oil and industrial metals. Even then, each market has its own fundamental dynamics. Energy transition spending on EVs and LNG-powered trucks continues to support demand for metals, gas, and power in 2025, while these same forces are simultaneously eroding global gasoline and diesel use at the margin. Copper and aluminium supply remains tight, while US natural gas could follow on reduced capex spending this year. Robust non-OPEC+ supply and potentially additional OPEC barrels could lead to an oversupplied oil market. Last, gold and silver may struggle in 1H25 until a clearer Fed rate cutting path emerges in 2H25 to push them higher.
Modest total returns ahead, but diversification may hold
Divergent performance across sectors and net negative roll returns this year have translated into flattish excess returns for commodities, a pattern that could reoccur in 2025 with more pronounced dispersion in both spot and roll returns. Still, diversification from commodities as an asset class has emerged as a key driver of cross-asset portfolio allocations, primarily due to crude oil and gold breaking links with equities, rates, and the dollar. While we see continued diversification benefits from commodity allocations, negative macro shocks—such as a reset higher in US real rates—or positive macro developments—such as major trade, tax or peace deals—could temporarily boost cross asset correlations at several points in 2025.
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Who keeps Bailing out the Bank shorts?🤣