Kenny Zhu, Director of Research and Investment Strategy at Sprott, stated that gold’s ability to hold its trading range and draw fresh ETF inflows amid surging US Treasury yields means the next major move for gold prices is likely to the upside. Meanwhile, central banks’ ongoing push to reduce reliance on dollar assets and accumulate gold is underpinning the long-term bullish thesis for the precious metal.
In an interview with Kitco News, Zhu pointed out that inflation and currency concerns driving yields higher may ultimately boost gold’s appeal. Both a soft economic landing and a sharper downturn could ease pressure on precious metals. A sudden shift toward looser monetary policy by the Federal Reserve could even amplify gold’s rally.
ETF Inflows Remain Positive
Zhu said gold-related fund inflows have stayed positive recently despite a strong rally back in August. “Given the inflation pressures, the flows have remained positive,” he remarked. “They’re not as strong as August, but still positive. To me, this shows there is still market interest in gold at current price levels.”
He further noted that gold has largely stayed within its current trading band while gold ETFs continue to see meaningful capital inflows. This indicates the market is in a wait-and-see state, yet this situation “leans more toward the upside.” In his view, some investors are taking the opportunity to gradually build positions and even increase allocations to the gold sector.
Still, Zhu cautioned against assuming massive capital will flood into this sector. “I wouldn’t say people are rushing fully into this space; I’m not that bullish,” he said. “But judging by media discussions, the market keeps talking about gold.”
At the same time, he emphASIzed that fixed-income investors are also highly engaged, as bond yields have climbed to multi-year, even multi-decade highs.
Central Bank Gold-Buying Trend Accelerates
Zhu believes a structural factor supporting gold prices is peRSIstent central bank purchases of gold. This trend existed well before 2022, though the Russia-Ukraine conflict significantly accelerated it.
He explained that after Russia’s invASIon of Ukraine, the US imposed sanctions on Russia and largely cut it off from international payment systems. This highlighted US influence over its currency system and spurred faster gold buying by central banks. “Since then, there has been a clear shift and acceleration in central bank gold purchases,” he stated.
He added that these sanctions triggered a result economists and analysts have feared for years: emerging markets including China have started cutting dollar exposure and allocating to gold, with other developing nations following suit. Russia has also been boosting its gold holdings.
“We’ve been talking about China potentially selling US Treasuries and reallocating into other assets, and that ‘other asset’ is gold,” Zhu said. “Russia is also turning to gold. I think since then, you have seen many emerging market central banks enter the gold market.”
He argued there are solid reasons for central banks to shift away from dollar assets toward gold even without war: to reduce exposure to US risks on one hand, and protect domestic currencies when the US dollar strengthens on the other. “What happens to your currency if the dollar rises? It weakens,” he said. “It may not be as severe for developed markets, but for countries like Turkey, it can be a major issue with extreme exchange rate swings. In such scenarios, you sell your holdings, and gold is one of those assets, along with Treasury bonds.”
He pointed out that looking at trends from 2022 to now, gold’s share in global central bank reserves has risen while the proportion of dollar-denominated assets and US Treasuries has fallen, and this shift is still ongoing.
High Yields Highlight Gold’s Value Instead
Zhu acknowledged that extremely high bond yields create obvious headwinds for gold. However, if rising yields reflect worries over sovereign risk and currency depreciation, gold will become more appealing even without coupon payments.
“When inflation rises, bonds suffer,” he said. “Because bonds may not deliver what you expect, such as hedging stock market declines. You have to understand what is driving higher yields. Over the past several months, even years, one driver behind this trade is currency debasement risk, meaning excess market liquidity. The Fed raised rates too slowly in the zero-interest-rate environment, essentially keeping liquidity abundant longer than it should have, and the inflation story is part of this.”
He called inflation “one of the Achilles’ heels of bonds.” “When inflation picks up, interest rates rise, and market rates move above the coupon of bonds you hold, bond values will be markedly depressed,” Zhu explained. “Even if you hold bonds to maturity, peRSIstent inflation erodes your purchASIng power while you receive fixed coupon payments.”
Two Scenarios to Determine Gold’s Path
Looking ahead, Zhu sees two possible scenarios for gold. The first is a soft economic landing where the Fed does not need aggressive rate hikes and can pivot promptly based on incoming data. In this environment, headwinds weighing on gold may ease, allowing gold prices to resume their longer-term structural uptrend.
The second scenario involves an unexpected economic shock, such as a black swan event leading to a hard landing and triggering the widely discussed major Fed pivot. “In that case, not only will pressure on precious metals ease, gains in gold and silver may even be amplified,” he said.
Overall, Zhu’s assessment is that while the high-rate environment will continue to suppress this non-yielding asset in the short run, central bank gold purchases, falling allocations to dollar assets, plus inflation and currency debasement fears are building firmer medium-to-long-term support for gold. Any unexpected shift in the Fed’s policy path could trigger a stronger upward reaction in precious metals markets.