Tim Graf (TG): This is Street Signals, a weekly conversation about markets and macro, brought to you by State Street Markets. I'm your host, Tim Graf, head of macro strategy for Europe.

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With that, here's what's on our minds this week.

This week, we're doing a deep dive on the best-performing major asset class of 2025 year to date, gold. Gold has always been a topic of interest for me. My very first job in finance was in the gold market, supporting the trading desk at Merrill Lynch many moons ago.

And almost no matter the macro narrative, the uptrend in gold over the last couple of years has appeared indestructible. And, as my guest this week highlights, it doesn't look in too much danger of breaking down anytime soon. Joining me to talk through all things gold is Robin Tsui, APAC gold strategist at State Street Global Advisors.

Robin Tsui (RT): Hey Tim, how are you going?

TG: Good, how's it going?

RT: Good, good. It's been a busy day today.

TG: I bet, I bet. Yeah, it's been a busy couple of months. And I'm guessing for you a very busy couple of years probably.

RT: Definitely since 2023. I think especially the amount of inquiries and the interest among some of the APAC asset owners and asset managers. I think we have never gotten so many requests before. I think this year is definitely with the price and just a growing need for investors to have some exposure to the gold. It's been quite a strong year in terms of client interests.

TG: Cool. Well, listen, let's get started. Robin, thanks so much for joining this week. I wanted to start and talk to you about the last couple of years really. We've seen this big run up in gold. We are about 7-8 percent off the highs, but nevertheless, we've seen very, very strong trend and a strong trend in demand as well. And I wanted to dial back a bit though and see if you could start with talking about what's driven these trends.

What are the most important drivers of price over the last couple of years in particular?

RT: If we look at gold as a commodity, there's four sectors where we always have to look at to sort of predict the price and also where demand is heading. Gold is driven by the investment sector, so the physical gold bars, ETFs, and then the central bank sector, which is quite an important sector to drive up gold prices and demand. But we also have to look at other sectors like technology and jewelry. Because if you look at the breakdown of the annual demand, jewelry actually represents still the largest proportion. So if we look back in the last 10 years, jewelry demand actually represents about 55 percent of global demand. So it's still very important.

But then we have the investment. If you look back at the last 10 years, it's about 30 percent, then central banks 15 percent, and then technology 5 percent. So when we look at the gold market in terms of demand, we have to look at all these sectors to ensure that we fully understand how gold demand is heading.

But as you mentioned, I think in the last few years, that breakdown has kind of changed. Because if you look, especially in 2024, jewelry only represents about 40 percent of the demand. And what's been growing, it's been the investment and central banks. If you look at, in particularly the first quarter, central banks and investment sector, already represent about 60 percent of the global demand.

If I say what's been driving gold prices in the last few months, or even the last few years, has been mainly the investment sector, led by the physical gold side and also gold back ETFs, and also central banks. And that's why we've seen a detachment in terms of, we have this high interest rate environment, but at the same time, gold price has rallied in the last few years, purely because central banks has been absorbing a lot of the supply from the mine productions.

TG: I guess that brings up the question of sustainability, especially at these prices. And it's interesting to hear that jewelry demand has gone down, or at least I guess as a proportion, it's been swamped by maybe other elements of demand that you mentioned.

But with prices where we are, could we expect the demand for jewelry to be, say, as one driver of price, as strong as it has been in the past? Or have we found in through history, natural limitations to demand created by price for things like jewelry?

RT: So when we look at jewelry, I think it provides the floor to the gold price. I think we saw that back in 2013, as we recall, gold price was trading close to about 1800, and then it crashed to 1000 in the space of a year. And at the time, China was a big buyer of jewelry. I think at that time, the jewelry buying actually supported gold price, I think by about US$200 to US$300 back then, because all these Chinese moms and dads, as we can recall, they all flock into the gold jewelry sector.

But at the same time, I think if you look at recently, there has been a negative impact on jewelry demand. And it makes sense because higher price environment, it may differ some of the buying maybe later, or when they see a bargain hunting prices, jewelry may come back. But in the first quarter, we did see quite a weak jewelry demand.

So I think going forward, I think it's a structural change, because if we look back 20 years ago, right before the GFC, jewelry actually represent closely about 80 percent of the global demand. So we're seeing in the last 20 years, there has been a major change in terms of the gold demand. It actually literally went from a consumer good 20 years ago, because jewelry is 80 percent, now to more as an investment item, and also it's a reserve currency for central banks, because 20 years ago, as we can recall, central banks actually sold gold.

So that's been a major shift in the last 20 years for gold, becoming more from a consumer good now to a more investment good and currency for central banks. So that's why going forward, jewelry will still be a very, very important sector, but I think the impact will slowly, slowly decline, because the investment central bank sector will become more important to drive up gold prices in the future.

TG: Let's talk about the central bank element. That's actually, I wanted to spend probably the most time on that, because I think, well, as a currency person, this is clearly important, and coming, especially, as I talked about on the last episode, we were in the Middle East last week. And I think not every meeting with a central bank or institution, but a lot of the meetings, we were asked about gold, how the dollar has been somewhat diminished in recent years for a variety of factors, which we'll hopefully talk about.

And I wanted to see if you could start to list those factors that have driven central bank demand. Why is it now becoming the marginal mover of price here?

RT: Yeah, I think it all started with the GFC. As I mentioned before, the central banks, they literally sold gold before that. They didn't think they need gold, but through the GFC and also the sovereign debt crisis, central banks realized they need some gold. So that's why since 2009, now for the 16th year, central banks had to become net buyers.

So clearly in the last few years, the driving forces has become more prominent because I think we look back a few years ago when the US started to sanction the Russians. I think that kind of gave some central banks, especially the emerging market central banks, kind of thinking, right, do they need more gold or should they sell some of the fiat currencies? Because potentially central banks, including the Fed or the US, can put sanction on some of the governments, especially in the emerging market central banks.

So I think that's why we, since 2022, after the sanctions, we have seen the central bank, they bought record amount of gold. So if we look back the average tonnage that central banks bought before 2022, it was around, it was about 500 tons. So between 2009 and 2021, 2022, it was 500 tons. But in the last three years has gone up to 1000 tons. So literally, central banks has doubled the exposure in terms of the buying.

And we all know that who's been buying because it's quite transparent. PBOC, China, Poland, India, some of the emerging market central banks which lack gold exposure has been ramping up. And I guess we expect this trend to continue because if we look at the latest central bank survey done by the World Gold Council or even conversation, as you said, with central banks, they actually want to know more about gold.

So in APAC, we continue to have quite a strong conversation with central banks. And central banks, the thing is they are not that price sensitive. They are in a way, but because they have a lot of capacity to increase. So if they think they want to increase the gold exposure, they will. And that's why you're seeing gold price two years ago, three years ago as 1400.

But with gold price now at 3300, we continue to see central bank accumulating. So that's why we think that going forward, central banks will remain the key, because they just realize that the growing need for non-fear currency, so gold obviously cannot be controlled or printed. So that's one way they can get the exposure to something they can rely on.

TG: What do you think the natural limit is in terms of percent of portfolio weight, of reserve portfolios, that is? If you consider that, let's say currently right now, the dollar is 50 to 60 percent depending on the central bank, I think the euro is maybe 20, and then you've got small 5 to 10 percent allocations for the yen, sterling, Swiss franc.

What do you think is a realistic expectation for, first of all, what central banks could allocate to gold? And then second of all, I'd be curious to see how far along we are in that process if you could estimate what they actually have as a total portfolio weight. I know that's a very nebulous question, but I'm just wondering, trying to put some numbers on it.

RT: So the central banks in terms of the goal holding is quite transparent because they don't have to, but they can report it to the IMF. So if you look at the global average, it's about 20 percent. So central banks around the world have around 20 percent exposure.

Quite clearly, you can sense it's quite a big number, because if we're purely looking at the developed market, central banks, so the US, Germany, Italy, for example, because of the legacy, because they needed to hold gold before, the average, it's close to around 65 to 70 percent. So you can see that the developed market, central banks, they do hold quite a high exposure to gold.

So that's why I think in the last 10 years or so, the emerging central banks realized that they need more gold. For example, China two years ago, or right after COVID pandemic 2022, they held only about 3 percent. But since then, they have been quite actively ramping up their gold exposure. So after a few years, they now hold 6.5 percent. But it's still very low compared to the historical, I guess the global average that's been held by central banks.

So we get a lot of questions surrounding obviously China. What's the target? Obviously, we don't know. But I think that if you look back, let's say Russia, for example, 15 years ago, they hold roughly around 5 percent of gold exposure, but now they have close to about 28 percent. So if we use Russia as an example, I think that's a good benchmark for some of the emerging markets to achieve.

But I think, I don't have a definite answer, but I think some of the emerging market central banks, they will want to get close to the global average, which is 20 percent. And if you look at China, India, Poland, Singapore, they're still underweight. So I think that's why if you look back in the last 10 years and go on forward, most of the buying will come from the emerging market central banks just to diversify the exposure in terms of the FX reserves.

TG: Yeah, and how are they doing this? Is this primarily via physical that they themselves take delivery of? Are they buying physical but storing it in... There's been a lot of talk about moving gold back to the US, and that was influencing the import numbers for the first quarter because people wanted it domiciled in the US and maybe domiciled, like self-custody of it.

How do central banks operate in that space and do they self-custody?

RT: The central banks, they normally buy physical. So most of the time, they will buy through physical, probably a store in their own country. For example, China will store the gold in China, Russia in Russia. But we know that as a few central banks, they fault it with either the US or even London, because London is still the most liquid in terms of physical market. So they will prefer physical.

I think they make sense because usually they're quite consider more conservative. So when we speak to clients that are more conservative, they will tend to buy the physical.

But interestingly, in the last probably six to eight months, we have been getting more inquiries from central banks in the APAC using other means of buying gold, especially with gold back ETFs where State Street do have a present. They would, you know, sometime would ask, you know, why ETFs is a better way?

Why is it more cost effective? So it's been a quite interesting journey and story in a way that we are finding more central banks willing to look into gold back ETFs. Obviously, they don't tell us why, but we think that because they may need ETFs to trade more tactically, because they might need more gold to hedge against uncertainty. And then sometime gold back ETFs can be more cost effective depending, you know, the amount they buy and also the market makers they use.

But now, if I can, you know, confirm, I think most of them still prefer physical at the moment, but I hope that will change going forward if they decide to trade more gold back ETFs.

TG: Yeah. Yeah. I mean, just thinking about events that have driven these flows that you mentioned, you mentioned the Ukraine War and the sanctions put on Russia as a big factor. And I just wanted to think very current events, right? Like we're in the middle of a peace process that may or may not result in success, and may or may not result in some sanctions on Russian assets, perhaps being lifted, not in the near term maybe, but over the long term.

Do you think maybe these positive geopolitical events dampen the upside pressure for gold? And here I'm also not just thinking of Russia, but the negotiations with Iran, and Trump is clearly keen to dial down the temperature globally when it comes to conflict. Does this worry you in any way, I guess, as a price risk, and that these flows might diminish as a result of that?

RT: Good question. I think potentially yes, because if you look at gold as an investment, some investors, they technically buy into gold as a way to hedge against political tensions. So potentially that could have a negative impact on gold prices.

But the beauty of gold is that there's so many drivers of gold demand, as I mentioned, is a hedge against inflation, is a hedge against currency depreciations. So there's other drivers and demand that could potentially push up gold demand in the future. But if all this scenario happens, yeah, I would expect there will be some pullback in the gold price.

But at the same time, we have clients and we're spoken to a lot of clients that they're actually waiting for this pullback. Even though we have seen gold price very corrected about 9 percent since the peak. So he's now trading at 3,200. But there are clients that still think, you know, gold has gone up a lot, it's still up about 20 percent this year.

And then another 23 percent last year, they're waiting for a price to kind of correct a bit, and then they could get in. So I'm not worried about gold price will enter into a bear market.

I think the last time gold price went to a bear market was 2013, as I mentioned. But a lot has changed already because, you know, central banks are big buyers, there's growing need to diversify. And then the physical demand remains very strong despite the high interest rate, especially coming from China. In Q1, China had the strongest Q1 since 2016, so literally in 10 years. So we can see that fundamentally.

I think if there's some sort of technical corrections, I do think there's some big buyers that's waiting to buy, especially at the institutional clines and also the central banks just waiting for a middle pullback and they can accumulate more just to increase the exposure.

TG: It feels a lot like tech stocks at the moment. You have these big pullbacks and now what we see actually from our institutional flow indicators is them piling right back in. There are people looking for pullbacks in assets like that.

Thinking about what drives gold prices, I mean, historically, going back 20, 30 years as a macro person, you could always rely on changes in real interest rates to drive gold prices. The inverse correlation between the two was 60, 70 percent at times and especially up until the last year or two. But that, of course, I know why it has broken. I think we spent the last 15 minutes or so talking about why that correlation is broken just given the more not, I won't say uneconomic flow you talk about, as you allude to price matters, but there's just a persistent backstop to the gold market.

But that rate relationship, do you think that is now permanently a relic of what drives gold prices or how to think about gold and it's much more important to focus on these flow-based drivers? Or do the rate cycles still matter?

RT: So if we look at real interest rate, you're right. I think the relationship, the interest relationship has been broken since 2022. We've been telling clients like one day it may revert back to normal, but it hasn't.

So what's surprising us is that despite the gold prices hitting records after records, the demand remains strong, not only from the central banks, but the retail investors, the asset managers, the asset owners, they still want more gold exposure despite the higher prices. So that's why I think fundamentally we have seen this inverse relationship. It's not following what we've been seeing in the last 30 years.

So going forward, we've been telling clients the real interest rate environment may not be as important. There's other factors to look at. I think the US dollar inverse correlation is still in play because if we look at the three-month rolling correlation, it's still quite negative. It's around -60 percent. So a weaker US dollar will be beneficial for gold. So I don't think that relationship will be broken.

But in terms of the real interest rate, yes, I think we have to look at other factors like physical demand, ETF flows, and also the amount of tensions around the world that investors and central banks, they don't mind paying a high gold price despite the high interest rate environment. Maybe one day it will revert back to normal, but we have not seen that happening since mid-2022.

And I think that's been a surprise to us as well with rates, especially with the normal interest rate at 4.5 percent. If you're asking, what's the gold price today, I probably would expect maybe 2000, mid 2005, but because of the central bank's buying head is so strong, that has supported the gold price.

TG: Let's talk about some of that retail and asset manager demand. You, of course, worked for State Street Global Advisors, and GLD is, of course, the flagship gold fund for SSGA. And I wanted to talk about some of the other flows.

The ETF flows you mentioned, central banks may be participating a little bit just as tactical trading opportunities, but can you describe the customer base that is the source of the inflows that you've been seen over the last year or two on top of the central bank demand factor?

RT: At SSGA, we track all the gold bank ETFs around the world. So there's about 160 gold bank ETFs, including our fund, GLD. So if we look at this year as of last Friday, we've seen about close to about US$30 billion that's gone into gold bank ETFs. So if we look at this number, it's actually quite big. So to put it into context, the whole of last year, we saw only three billion of net inflows. So you can see the first five months or so, the demand for gold bank ETF remained quite strong.

So if we look at the breakdown of the flows, it's been driven by the US and also Asia. The first three months, most of that has been driven by the US investors. But then interestingly, in April, when Trump started to put all these tariffs, and especially the tariffs on China, we actually saw a record month for Asia driven by China. So it's quite interesting that different regions will have different reaction to different events globally.

But in terms of the investor, I think it's been a mixture, but I think mostly has been driven by the institutional and asset managers. Because if you look at the amount of money that's gone into go back ETFs, that 30 billion is quite a substantial amount in terms of flows. And if we look back in the last two years, we're actually seeing outflows from go back ETFs. So 2021, 2022, 23, we saw outflows despite the higher gold prices. Because back then, interest rates were a bit high in the US and also in Europe.

The inflows only came back probably mid last year, when the Fed and the ECB started cut rates. And then because of these tensions and Trump becoming the president in late Q4, that amount of inflow has been gone higher in terms of the demand. So yeah, I think go back ETFs will remain quite strong. From a client perspective, it's just easier to trade go back ETFs as a way to technically hedge against the market uncertainty. So, that's why we do think ETFs will remain quite strong heading into the second half of this year.

TG: And the asset manager flows, is that strictly institutional money? I think you did mention that. How much is it driven by retail and then absorbing retail flows and then putting it into ETFs like yours?

RT: So I don't unfortunately have a breakdown for all the go back ETFs, but for GLD, I guess a rough estimation we have, so we can look through 13F data, 40 percent globally is retail and 60 percent is institutional. So GLD as a highly liquid product is like by institutional investor. And because we have a huge GLD option market, so we expect a lot of asset managers and private banks will exercise those options and enter GLD through the option market.

On average, as I said, it will be 60 percent institutional, 40 percent retail demand.

TG: Okay. Do you find in conversations, cryptocurrency has been mooted as digital gold, right? And it is deriving support from a lot of the same factors you've talked about in terms of looking for alternatives, wanting to move away from fiat currency, and particularly something like Bitcoin, getting away from things that can be printed as a key motivation.

In your conversations with clients, how much does crypto come up and how do you talk to clients around the competitive advantage of gold versus crypto or vice versa?

RT: We do get some questions, but I think in the last couple of years, I think investors do realize there's a huge difference between Bitcoin and gold. Bitcoin does have some key similarities with gold. They can't be printed, it's very limited.

But the huge difference will be that Bitcoin's obviously the volatility is a lot higher than gold. Bitcoin's annualized volatility is 100 percent, gold is around 15 percent. So from a portfolio construction point of view, gold might do a better job in terms of reducing the overall volatility of the portfolio.

Even though gold and Bitcoin has very low correlations to the equity market, when we look at the equity beta, the Bitcoin beta is actually quite high. t's about 3.2 if we compare that to the global equities. Gold is about 0.6. So clients know that we show in the numbers that Bitcoin is more of a leverage play. So that's why every time we've seen the market corrects, Bitcoin hasn't really done the work in terms of providing that protection.

So clearly, I think clients, especially in the last few years where Bitcoin has gone through some corrections and volatility, a lot of clients do realize that we're not comparing apple to apples. Bitcoin, it's more for chasing better returns. The price performance can be quite strong, but gold is more as an asset class that can provide that diversification, low correlation. It can reduce your overall portfolio and improve the portfolio risk, such as the return.

TG: So thinking about the conversations you have with clients about how much they should be allocating. You know, a lot of different types of institutions are taking greater weightings towards gold and other alternative assets. And I wanted to just see, as we start to close, how you are talking to clients about what they should be holding or what you think is kind of an optimal portfolio weight. And I want to go across the range of investors from the very large asset owner clients you speak to, down to retail or even high net worth.

What do you think is the right allocation?

RT: As you mentioned, gold is a lower volatility asset than, say, Bitcoin, but it is still, I think, well, certainly relative to fixed income. It's a higher volatility asset. And so what's the right mix here for these ranges of investors? So Tim, so we do a lot of backtesting in terms of adding gold into a portfolio. So going back to 1971 when gold price became unpegged to the US dollar, re-run analysis. So putting gold into a 20 80, 50 50, 60 40, 80 20.

So if an investor have a typical 60 40, so global equities and global bonds, what we found is that when we run that analysis, typically between 5 and 10 percent, it's the range where the sharp ratio actually improves. Obviously we're not gold bugs, we don't suggest 50 percent into gold, but if a client comes to us 60 40, then we can show this analysis for them or even rerun analysis of them to let them know or educate them about how much gold is optimal.

And I think that 5 to 10 percent also is applicable to multi-asset portfolio. So we do run a study using gold, put it into a multi-asset portfolio with commodities, hedge funds, private equities. And the result is quite similar. So what we found is that between 5 and 10 percent is the range that we can see that it can improve the portfolio risk of success to return. It's a good strategic allocation to have. And anything over 10 percent that will be considered more tactical.

So obviously we're not a gold bug, but I think 5 to 10 percent is a benchmark. Usually we tell clients. But in fact, a lot of clients, they don't have 5 percent. Most of them will have, let's say, 2 percent, 3 percent. So that's why we think there's more room for goal demand to increase, because especially in the last few years, we have seen clients that wanting to increase the allocation, perhaps from 2 percent to 3 percent or 4 percent to 5 percent. But the general trend is that clients do want to increase allocations. It doesn't have to be 5 percent or 10 percent, but the trend in terms of the overall trend, what we're seeing is that they want to increase more.

TG: That's great. Just to finish, let's think about your outlook. I don't know if you guys do forecasts, but I'd be curious to hear if you do, say for the next 12 months, we're at, as we record this on Monday morning UK time, 32, 36 is the spot gold price. That's off a high of around, well, almost exactly US$3,500 was the high back in April.

What's your, do you have a 12 month forecast relative to that?

RT: So we have a trading range in terms of our bull case, bear case and base case. So in that base case, which we revised a month ago, we do expect gold price to hit US$3,500. That level, we actually saw that a couple of weeks ago until all the SPs and a rolling back of a terrorist. But we feel quite comfortable that if central banks continue to buy, ETF flows continue to be strong, strong demand from China. And if there's a bit of risk in terms of the tariffs and the global trade war, I think the US$3,500 is the range we expect gold price to hit in the next 12 months. I mean, you already hit a couple of weeks ago, but that's our base case.

In the bull case, which we expect, if there's some sort of higher risk in terms of the global trade war, slowing growth in the US, high inflations, we are looking at US$3,900 by year end. Obviously, there has to be some escalation of risk in terms of the tensions and global trade war, but potentially, we can see this if all these indicators we look at plays out.

We do have a bear case. We have a bear case of about 2,700 US per ounce, but we put this probability as a very low because, as I mentioned earlier in the broadcast, is that I think if gold price do dip to about 3,000, we probably expect a lot of dip buyers coming, including central banks and global investors around the world.

TG: What would be the drivers, just as a final question, of that bear case? What do you think is the biggest price risk at this point?

RT: I think some sort of cancellation of the trade tariffs, if there's no tariffs, and then that will lead to a very strong USD market. A lot more money piles into equities and also the US dollar, so potentially that will have a negative impact on gold prices.

Also, if central banks somehow become net sellers, which I don't believe, but if they become net sellers of gold in 2025, potentially that will have an extremely strong negative impact on gold. If all this scenario plays out, potentially we could see hitting our bear case of 2,700 US per ounce.

TG: I have to agree, I feel that's a pretty low probability that any of that happens, especially after the case you've made and it's been a great case. And Robin, I'm so grateful for the time you've given. I really appreciate you joining the podcast this week.

RT: Thank you, Tim.

TG: Thanks for listening to Street Signals. Clients can find this podcast and all of our research at our web portal, Insights. There you'll be able to find all of our latest thinking on markets where we leverage our deep experience in research on investor behavior, inflation, media sentiment and risk, all of which goes into building an award-winning strategy product. And again, if you like what you've heard, please subscribe wherever you get your podcasts and leave us a review. We'll see you next time.