Central Banks Around the World Are Dumping U.S. Bonds and Scrambling to Buy Gold! Sprott Executive Issues Major Warning: Gold Could Be on the Cusp of an Explosive Rally!

Kenny Zhu, Senior Director of Research and Investment Strategy at Sprott, stated that gold's ability to maintain its trading range and attract new ETF inflows despite surging U.S. Treasury yields suggests that gold prices are more likely to break through to the upside. Meanwhile, central banks worldwide continuing to reduce their reliance on dollar-denominated assets and shifting toward gold are providing support for the long-term bullish thesis for gold.

In an interview with Kitco News, Zhu noted that the inflation and currency concerns driving yields higher may ultimately enhance gold's appeal; whether the economy achieves a soft landing or experiences a sharper downturn, both scenarios could ease pressure on precious metals. If the Federal Reserve suddenly pivots to easing, gold's rally could be further amplified.

ETF Inflows Continue

Zhu stated that despite a strong rebound in August, recent gold-related fund inflows have remained positive. "Considering inflationary pressures, fund inflows have been positive," he said, "though not as strong as in August, but still positive. For me, this shows that at current price levels, the market still has interest in gold."

He further noted that gold has basically maintained its current trading range while gold ETFs continue to see meaningful fund inflows, suggesting the market is in a wait-and-see and hesitant phase, but this state "may be more inclined toward the upside." In his view, some investors are using the current opportunity to gradually enter positions or even increase their allocation to the gold sector.

However, Zhu also cautioned against assuming that funds will surge into this sector in large numbers. "I wouldn't say people will rush into the sector all at once, I'm not that aggressive," he said, "but judging from the heat of media discussions, the market has indeed been talking about gold."

Meanwhile, he emphasized that truly enthusiastic investors also include those in fixed income, as bond yields have risen to levels not seen in many years or even decades.

Central Bank Gold Buying Accelerates

Zhu believes one structural factor supporting gold prices is the continued buying by central banks worldwide, a trend that existed even before 2022 but has been significantly accelerated by the Russia-Ukraine conflict.

He noted that after Russia's invasion of Ukraine, the United States imposed sanctions on Russia and essentially excluded it from the international payment system, highlighting the U.S. influence over its currency system and prompting central banks to accelerate gold purchases. "Since then, there has been a clear shift and acceleration in central bank gold buying," he said.

He added that sanctions policies have also produced results that economists and analysts have long worried about: emerging markets including China have begun reducing their reliance on the dollar and shifting toward gold allocations, with other developing countries following this trend. Russia has also been increasing its gold holdings.

"We've been discussing that China may begin selling U.S. Treasury bonds and reallocating to other assets, and that 'other asset' is gold," Zhu said. "Russia is also turning to gold. I think since then, you've started to see many emerging market central banks enter the gold market as well."

He believes that even without considering the war factor, central banks have sufficient reasons to shift from dollar assets to gold: on one hand, reducing exposure to U.S. risks, and on the other hand, protecting their domestic currencies when the dollar strengthens. "If the dollar rises, what happens to your currency? It weakens," he said. "For developed markets, this may not be so serious, but for countries like Turkey, this could be a major issue, with very sharp currency volatility. In such situations, you'd sell off your holdings, gold is one of them, as are Treasury bonds."

He pointed out that if one looks at the trend from 2022 to the present, one会发现全球央行储备中黄金占比上升，而美元计价资产和美债占比则在下降，这一变化仍在延续。

High Yields Actually Highlight Gold's Value

Zhu acknowledged that extremely high bond yields pose obvious pressure on gold, but if rising yields reflect sovereign risk and currency depreciation concerns, then even without coupon payments, gold would appear more attractive.

"When inflation rises, bonds get hit," he said. "Because bonds may fail to serve the function you want, such as hedging against stock market declines. You have to understand what is driving yields higher. Over the past few months, and even the past few years, one of the drivers behind this trade has been currency devaluation risk, which is to say, excess market liquidity. The Federal Reserve raised interest rates too slowly from zero, basically allowing liquidity to persist longer than it should have, and there's also the inflation narrative."

He referred to inflation as "one of bonds' biggest Achilles' heels." "When inflation rises and interest rates increase, causing market rates to rise relative to the bonds you hold, bond values get significantly suppressed," Zhu said. "Even if you hold bonds to maturity, if inflation persists, you're collecting fixed coupon payments while your value is still being eroded, because those coupons are typically fixed."

Two Scenarios Determine Gold's Direction

Looking ahead, Zhu believes gold may face two scenarios. The first is a soft landing for the economy, where the Federal Reserve doesn't need to raise interest rates significantly and can pivot timely based on data changes; in such an environment, the headwinds suppressing gold may ease, and prices could return to a longer-term structural upward trend.

The second scenario is an unexpected economic shock, such as a "black swan" event causing a hard landing and triggering the widely debated Fed pivot. "In that scenario, not only would pressure on precious metals ease, but the rallies in gold and silver could even be further amplified," he said.

Overall, Zhu's assessment is that while the high interest rate environment will continue to suppress non-yielding assets in the short term, central bank gold purchases, declining allocations to dollar assets, and concerns about inflation and currency depreciation are building a more solid medium-to-long-term foundation for gold. Should the Federal Reserve's policy path change unexpectedly, the precious metals market could experience a more powerful upward reaction.