Although gold prices have recently had less positive developments as the precious metal has not been able to maintain its safe haven role, gold continues to attract strong interest from investors thanks to increased geopolitical tensions and changes in the macroeconomic context, according to the World Gold Council.
In February, physical gold-backed gold ETFs worldwide recorded capital inflows of 5.3 billion USD, marking the ninth consecutive month of net cash flow and the strongest year-on-year start ever recorded. Global gold holdings increased by 26 tons to 4,171 tons, while gold prices rose, pushing the total managed assets of funds to a record 701 billion USD, according to the latest ETF capital inflow report of the World Gold Council released last week.
Most of the demand continues to come from North America with capital inflows reaching 4.7 billion USD in February, extending a nine-month consecutive series of increased investment demand. The World Gold Council (WGC) said that periods of strong capital flows often appear during periods of increased systemic risk, such as the global financial crisis or the COVID-19 pandemic.
Investment demand also maintained sustainability in other regions. Gold ETF funds in Asia recorded capital inflows of 2.3 billion USD in February, extending a six-month consecutive growth streak, mainly driven by Japanese investors in the context of political instability, weakening the yen and a sharp increase in gold prices in the domestic currency.
Europe is the only region to record capital outflows when losing 1.8 billion USD, mainly due to net selling activities at the beginning of the month after a sharp decline in precious metals at the end of January. However, capital flows then reversed to positive at the end of the month, showing that these capital outflows do not reflect a long-term change in investor sentiment.
In an interview with Kitco News, Mr. Joe Cavatoni – Senior Market Strategist of (WGC) said that geopolitical tensions are still an important factor promoting investors' persistent interest in gold. However, he also noted that geopolitical shocks may trigger strong price increases in the short term, but the long-term outlook for gold ultimately depends on fundamental factors rather than the market's immediate response.
He said there will be price increases but it is necessary to wait for the market to see the results of systemic events. In the current context, fundamental conditions are still supporting the sustainable upward trend of gold prices because the fundamental factors driving this asset have not changed.
Although gold prices enter the new month with weak developments, Mr. Cavatoni believes that there is little basis to assert that the long-term upward trend of gold is ending in an uncertain world. He also emphasized that investors need to understand that fluctuations at current high prices are a normal function of the market. According to him, higher levels of volatility reflect the increasing participation of investors in the gold market.
He said that when assessing market volatility, he looks at three factors. The first is the increase in interest and acceptance of gold as an investment channel. As the rate of investor participation increases, volatility will also be higher along with stronger price performance. According to estimates by the World Gold Council, this trend is likely to continue, creating a growth trajectory accompanied by higher overall volatility. Besides, there is the momentum factor that he describes as market excitement, which traders often call the psychology of excitement of traders when seeing gold prices increase and fear of missing the trend (FOMO).
Cavatoni's assessments are made in the context that the annual volatility of the gold market is increasing to about 25-30 percent, compared to the industry's traditional expectation of about 15 percent. However, he believes that the volatility of gold is currently increasingly similar to other risky assets.
He said that real gold is moving similarly to other risky assets as cash flow in the market moves faster than ever and the number of investors participating in the gold and silver market is also higher than before.
He also said that gold is providing important liquidity in the overall investment portfolio, helping investors cope with the instability of the larger market.
However, Mr. Cavatoni also warned that not all fluctuations are positive. Structural disruptions in the financial system such as transport congestion, tariff measures, or problems in market infrastructure can create more unpredictable fluctuations.
He believes that this is just a worrying type of fluctuation because those are extremely unpredictable times and the market can hardly prepare in advance.
Despite periods of fluctuation, the trend of ETF capital continuously flowing in still shows that investors continue to consider gold as an important strategic asset in the context of increasing geopolitical instability and a changing macroeconomic environment.
Mr. Cavatoni said that even in a volatile environment, gold will still maintain its role as an effective investment portfolio diversification tool because this precious metal is no longer just an asset that depends solely on interest rates.
Although central banks' gold buying activity has decreased compared to the three-year peak, he believes that demand from the formal sector will still play a stable supporting role, contributing to creating long-term value for gold.
