The Ascent of Gold: A Closer Look at the Key Drivers

As gold prices continue to reach unprecedented highs, a leading bank points to two key 'active buying forces' propelling the surge: central banks and Exchange Traded Funds (ETFs). Spot gold prices hit a record high on Monday, touching the $3,830 mark, a cumulative increase of over 45% year-to-date. A report released by Deutsche Bank reveals that ETFs' influence on gold pricing has increased by 50% compared to the past three years. This figure supports the bank's bullish outlook, set on September 17, targeting a gold price of $4,000. In his research exploring 'Who's Driving Gold Prices?', analyst Michael Hsueh, author of the report, points out that gold ETF investors are experiencing one of the top three years in gold holdings since the product's inception. The popular SPDR Gold Shares ETF was listed on the New York Stock Exchange in 2004.

Detailed Market Forces Analysis

While Michael Hsueh emphasizes that the Assets Under Management (AUM) of dollar-denominated ETFs are 70% higher than 2020 levels, this has not prevented gold from rallying - especially since ETF gold holdings are at 15 million ounces, below the 17 million ounces in 2020, suggesting room for growth. Applying the 'Granger causality test' to the gold market, Michael Hsueh unexpectedly found that gold price changes led to ETF fund flows, not the other way around. The test also revealed that current interest rate changes are more significant for gold prices than dollar movements. This conclusion aligns with the view of Robin Brooks, a scholar at The Brookings Institution, who wrote on X that 'the market is not trading dollar debasement, but a general debasement of all fiat currencies against gold,' calling it 'a signal of a global debt crisis.'

The Role of Central Banks and Jewelry Demand

When discussing the core drivers of the gold rally, Deutsche Bank's Michael Hsueh believes that 'not all demand is created equal.' He points out that official demand from central banks is price insensitive – central banks have added 400 to 500 tons of new gold demand annually over the past three years, and this growth has coincided with a significant rise in gold prices. In contrast, jewelry demand is highly price-sensitive, with higher gold prices leading to reduced jewelry demand. Surprisingly, increased jewelry demand may actually be a 'bearish signal' for gold prices, as jewelry demand only rebounds when gold prices fall. ETF investors are different. Their demand is relatively less elastic, which may explain why gold prices consistently exceed analysts' forecasting models – analysts find it difficult to quantify the impact of ETF demand on gold prices. Michael Hsueh added that demand for gold bars and coins is also relatively price-insensitive. Michael Hartnett's weekly fund flow report released last Friday provided further evidence of strong ETF demand momentum for gold: the report showed that gold funds received a record $17.6 billion in inflows in the prior four weeks. Michael Hartnett attributes the rise in precious metal prices to the return of inflationary policies and a 'war bull market.' He says that while gold is 'tactically overbought,' it should still be held long-term - because in terms of asset allocation, gold is still 'structurally underweight': gold currently accounts for only 0.4% of Bank of America private client wealth and 2.4% of institutional assets under management.