(Kitco News) – Global gold ETFs are beginning to respond to geopolitical risks, but the big driver of gold prices will be rate cuts from central banks, according to Joe Cavatoni, chief market strategist for North America at the World Gold Council (WGC).
In a recent interview with Schwab Network, Cavatoni said that the WGC is watching global ETF flows very closely as gold prices trade above $2,400 once again, but that the real driver for a gold bull market will be the start of rate cuts from the Federal Reserve.
“We're getting that sentiment out of the Fed that the rate cut is likely on its way,” he said. “That's going to be that catalyst which we talk about in our mid-year outlook that could bring back the Western investor to the market.”
Cavatoni said the WGC is very focused on demand from Asia, and China in particular, as the combination of central bank buying and investor interest in that part of the world has been a big part of gold’s price support. “With the central bank activity and the rise of the Eastern investor, all eyes are on that part of the world to see if that's going to continue to keep that floor in place,” he said. “That's really been holding us up in terms of those prices, holding us up and keeping that in place.”
“Will the Western investor come back? Will the eastern investors stick around? It's a big question,” he added. “We're keeping an eye on it, and lots to unpack.”
Cavatoni also drilled down into the latest gold market demand data from China, which showed continued weakness in wholesale demand but no let-up in buying from ETFs.
“This is a really interesting point to highlight,” he said. “Remember that jewelry is a large component of where gold is consumed, the sources of consumption and demand in both India and China. It surprised us to the upside in the early part of the year with a flat gold price. As prices get higher and consumer sentiment, in particular in China, start to get in question, the question is whether or not the pace with which jewelry can sustain the demand levels will be in place. That needs to be offset in China by the growing concern that we have around the investment landscape. And it's been a bright spot, but can it pick up the pace and fill the gap that we might see that comes from a slowdown in jewelry?”
Cavatoni also said that the People’s Bank of China (PBoC) refraining from gold purchases for the second month straight in June after over a year and a half of continuous buying was expected. “I don't think it's a big surprise,” he said. “We've seen the PBoC, and the Chinese buying of gold at the central bank level, have these types of patterns in the past when the prices particularly get high. But what I think is important is they have been the largest consumer at the central bank level. Their reserves are at about 5%, at this point, made up of gold, and I think that the slowdown isn't a terrible surprise.”
He said the WGC is keeping a close eye on the situation, however, to see if the PBoC impacts the sovereign buying of other countries. “Will other central banks follow suit?” he asked. “Our annual survey has highlighted that most of what's motivating central banks to buy is the fundamentals in their homegrown economic situation, as opposed to any geopolitical risks or worries about sanctions. It's really about the risks that they have onshore.”
Cavatoni said China has a lot of important data to focus on this week. “They've got real big policy announcements that could be made,” he said. “The concerns around the strength of the renminbi, defending that currency, and also interest rates onshore. Local governments are subject to high levels of debt. And those concerns that those high levels of rates can continue to weigh on consumer spending. Will those levels of debt, will this all come together to put a lot more pressure on the PBoC? Will their energy be redirected elsewhere, particularly looking at defending the currency?”
Cavatoni added that while China’s central bank may slow its purchases, which could put some downward pressure on gold prices in the near term, the WGC doesn’t see any scenario in which the PBoC or any central bank actually begins selling their reserves, even at all-time high prices.
“We don't see an environment where central banks will be unwinding or selling their gold positions,” he said. “Quite the contrary, an environment for them to continue to assess and move carefully into further holdings in their reserve portfolios. It's an emerging market trend, and it's something that looks very likely to stay.”
He concluded by sharing his views on the potential impact of geopolitical tensions, which he sees playing second fiddle to rate cuts as the driving force behind gold price movements.
“We talk a lot about what's going to move that Western investor back [into gold],” Cavatoni said. “I think that geopolitical tensions can go hot and cold. I think right now, it's about that monetary policy from the Fed. In Europe we've had a rate cut by the ECB, we have some political uncertainty in certain elections that are taking place, and that ongoing question around, how is Europe going to continue to support the efforts in Ukraine? All of that's led to about a $2 billion inflow into the European ETFs over the last two months.”
“It's a little bit of a signal,” he said. “When [rates] start to move in the U.S., that's going to be the catalyst that we're going to see for gold prices and allocations to increase.”
