John, did you pop a bottle of champagne when the Fed cut rates by 50 basis points?

No, I did not. I was actually frustrated because I’ve made public calls saying I think the Fed would cut by 25 basis points. I simply did not think there was a crisis. And I thought that by cutting by more than 25 basis points, the Fed would be signalling that something was wrong. But the big step contributed to further highs in the gold price. To be honest, after the economic data that came out last Friday the economy actually looks a bit stronger than the Fed would have expected at the time of their decision.

The labour market in the US is powering ahead which caused yields along the curve to rise. Yet, the gold price corrected only slightly.

I think the US economy is slowing and – putting the election aside for a moment – I would expect the Fed to cut by 25 basis points at each of the last two meetings of this year. I do not think that one strong labour market report and revisions are going to change the Fed’s view on the interest rate cycle. That is good news for gold. One needs to keep in mind: Most recessions start off by looking like a soft landing. yet, I have been surprised by the resilience of the US economy. It may be that it is not as resilient as we think it is. It is just that the impact has been delayed. So, I certainly do not rule out the potential for a recession at some point, probably next year.

Since you mentioned the US elections: the related uncertainties, which may drag on even after we got the results, should have a positive effect on the gold price, right?

Well, you might think so, but the first move during a period of financial market instability is for gold to sell off. We saw this, for example, after the failure of Lehman Brothers at the onset of the global financial crisis. We saw this in the initial volatility period around Covid too. And the reason for this is that investors, when they are hit by a sudden increase in uncertainty and volatility, will sell everything and rush for cash. And that includes gold. In fact, gold actually can be one of the better assets to sell because the market has remained liquid during these periods of instability.

Is this an advice to take profit in gold investments before the election?

No, not at all. When I speak to potential investors in gold, many of them seem frustrated that there has not been a correction, for them to get back into gold or to increase their holdings. There are a number of events that could cause a correction in the gold market. We know that speculators, particularly in the US Comex market for futures and options, are holding large, long positions. Something may happen to trigger profit-taking from those investors.

What would that trigger be?

That could include stronger economic data, like we saw on Friday, which has led to a bit of gold price softness. Or indeed, we could get a geopolitical shock or a US political event which would lead to liquidations. But the medium to longer term price development of gold will be supported by interest rate cuts, whether we have a recession or not, and whoever is present in the White House. It is possible that investors who have missed the gold rally thus far may be getting better buying opportunities over the next few months.

People are just waiting to buy the dip?

Investors own gold, but they don’t own as much as they wanted to do. And each time there is a dip, they are quick to jump in and add to holdings. So, I personally think that the corrections will be shallow, because everybody is waiting to buy the dip, and therefore, we are not going to get one. And if there is a deeper dip – a 200$ or 300$ correction – I think it will be very enthusiastically bought.

Textbooks tell us once real rates increase, opportunity costs of holding gold rise and the gold price should get under pressure. The amazing point really is the resilience of the gold price.

Gold has been strong for a couple of years. The fact that central banks have doubled the amount of gold that they purchase since the middle of 2022 has definitely been one of the factors, that has prevented the gold price from coming under pressure from higher interest rates and a stronger US dollar. But it is not the only factor. A lot of the buying of gold has come from emerging market investors. These Investors have been reacting to domestic financial and political events rather than following what is happening with the Dollar and US interest rates.

Could you please specify these buyers?

The demand trends have varied over the years but I am referring to Chinese, Indian, and Turkish investors, but also to a lesser extent, there has been increased demand from Middle Eastern Southeast Asian investors too. So gold is fulfilling a role not just as a barometer of US market indicators, like interest rates and currency, but also of emerging markets’ domestic financial or political problems. China has been the big driving factor. The weakness we have seen there in the property and other markets, including the currency, pushed Chinese investors into gold in the first half of this year. We are watching very carefully to see what is going to happen to the Chinese economy now, following the announcements of a fairly broad-based-based stimulus package to try to improve the economy.

And these investments form emerging markets go into ETF or is it over-the-counter demand?

ETF demand from emerging markets has been notable, but it is a much smaller component of the gold market in those countries than it is in Europe or North America. The principle way that we have seen evidence of this strong demand has been through the coin and small investment market. And we believe, although you do not get good data on it, in the OTC market as well. The over-the-counter market is opaque by nature, so we have to rely much more on anecdotal evidence and inference rather than hard data, like we have for ETFs. Demand has been strong from family offices and high net worth individuals who hold assets outside of these emerging markets, perhaps in Singapore, Hong Kong, or other financial centres in the region.

Western investment demand has been rather weak this year. Do you see more inflows there?

As interest rates have started to fall, firstly in Europe and now in the US, we are seeing signs that Western investment demand may be improving, but it is early signs. We now have five successive months of ETF inflows globally, which we have not seen since 2022, so that is positive. Anecdotal evidence from coin and bar dealers suggests that Q3 Western retail demand will remain quite weak. I think the fact that interest rates are falling is good, but they are still at relatively high levels compared to where they were a few years ago. But lower interest rates are bound to turn Western investment demand around.

Which part of the yield curve is more decisive for gold investments, short or long rates?

I think it is a combination of both. Institutional investors probably pay more attention to the development of long-term rates. Whereas retail investors compare what they can get in a money market fund and then evaluate the opportunity costs for investing in gold. Either way, lower Fed rates will help catalyse retail demand. As I said, institutional demand has slightly different drivers. And there I would be looking for more signs of weakness in the equity market.

Is central bank buying a structural driver for the gold price?

We have a team that speaks only to central banks and we also conduct a yearly survey among central banks which gives valuable insights into how they are thinking about gold within their reserve asset portfolio. More than eight in ten respondents to the survey have indicated that they expect reserve managers will increase their gold holdings in the next 12 months. Naturally central bankers are very tight-lipped when it comes to revealing their future purchasing plans. They are carrying out mandates that are given to them to increase gold holdings either quantitatively or as a proportion of reserves. So, they need to get the buying done. But I think the ability of Western central banks to sell is very much curtailed by bad experiences of selling at wrong prices in the past and by populace pressure.

Another structural topic is the use of gold in technological appliances.

That is certainly a long-term driver as well. Gold demand in electronics is being boosted by the demand for artificial intelligence chips and by the fact that everybody is having to upgrade their laptops, smartphones, data centres, et cetera. It is a small component, but it is having a positive impact on growth. And it really does demonstrate that gold has a genuine technological use in the 21st century. It is not just about jewellery and investment.

Has jewellery demand been weaker this year?

Obviously, higher prices tend to slow jewellery demand, and we have seen that taking place in some markets, particularly in China. But in general, all markets saw jewellery demand lower because of higher prices. But India just slashed import duties at the beginning of July and that has really ignited demand for gold in the Indian market ahead of the wedding season. Between the two of them, India and China make up more than 50% of global consumer demand for gold. And their shares could be about the same size this year.

The margins of mining companies must have exploded in this environment.

From what I can judge, and from conversations that I have had with analysts that follow the gold mining companies, margins should be at a record currently. And the gold industry appears to have lowered cost inflation at the same time as the price of gold rose, helped also by currency movements.

What is the biggest challenge for mining companies nowadays?

That is definitely permitting. When you make a discovery, or even when you find a block of ground that you would like to explore upon, you need all sorts of permits from governments and regulators. Getting those permits is more difficult and it takes longer than it has done in the past.

How high can the price of gold go? Is the sky the limit?

The way we think about gold over the long term is that it should deliver returns of maybe 2 to 3 percentage points above US inflation. Thus, one should expect 4 to 5% return from gold over the long term. Obviously, we have seen a stronger performance from gold both last year and this year to date. But we should not project that forward and expect that every year. At the moment, we are in a position where – with interest rates expected to fall in the United States and other Western economies-, that is usually a good backdrop for gold price performance. The environment is favourable and gold could go higher. But again, I think investors need to temper their optimism and not just take the recent return for granted.