Joe Cavatoni, chief market strategist for North America at the World Gold Council (WGC), emphasizes that while geopolitical tensions are influencing gold ETFs, the primary driver of gold prices will be interest rate cuts from central banks.
In a recent interview with Schwab Network, Cavatoni noted that gold prices have climbed back above $2,400, and the sentiment from the Federal Reserve suggests that a rate cut is on the horizon. “That’s going to be the catalyst that could bring Western investors back to the market,” he said.
Cavatoni highlighted the significance of demand from Asia, particularly China, where central bank purchases and rising investor interest have supported gold prices. “With the activity from central banks and the increasing presence of Eastern investors, we’re looking closely at whether this trend will continue,” he remarked.
However, he pointed out ongoing weaknesses in China’s wholesale gold demand, despite strong ETF buying. He stressed that jewelry remains a major component of gold consumption in both India and China. As prices rise and consumer sentiment falters, there are concerns about whether jewelry demand can sustain its current levels, especially if investment interest does not increase to fill any potential gaps.
Cavatoni mentioned that the People’s Bank of China (PBoC) paused its gold purchases for the second consecutive month in June, following an extended period of buying. “This isn’t surprising, given past patterns when prices rise,” he said. Despite this slowdown, he emphasized that the PBoC remains the largest central bank consumer of gold, with about 5% of its reserves in the metal.
The WGC is monitoring whether the PBoC’s actions might influence other central banks’ purchasing decisions. “Our survey indicates that central banks are motivated by their domestic economic fundamentals rather than geopolitical concerns,” he explained.
This week is critical for China as it faces significant policy announcements regarding the strength of the renminbi and interest rates, particularly in light of local governments’ high debt levels. Cavatoni is keen to see how these factors may pressure the PBoC.
Despite potential near-term downward pressure from reduced PBoC purchases, Cavatoni does not foresee central banks selling their gold reserves, even at peak prices. He believes that central banks will continue to assess and carefully expand their gold holdings.
Cavatoni concluded that while geopolitical tensions are significant, they play a secondary role compared to monetary policy from the Fed. He pointed out that recent ECB rate cuts and political uncertainties in Europe have also contributed to about $2 billion inflows into European gold ETFs in the past two months. He anticipates that once U.S. rates begin to move, it will act as a major catalyst for increased gold prices and allocations.
