The long-term support logic of gold from the perspective of the ECB interest rate decision

Interest Rate Pause Highlights Gold's Resilience

The European Central Bank kept its three key interest rates unchanged at its July monetary policy meeting, as expected: the deposit facility rate at 2.25%, the main refinancing rate at 2.40%, and the marginal lending rate at 2.65%. This decision did not trigger sharp fluctuations in the gold market. Spot gold edged down to around $4,070 per ounce on the day but firmly held above the key support range of $4,000.

On the surface, the ECB's inaction was in line with expectations, and the market reaction was muted. However, a deeper analysis shows that this rate decision reveals a common dilemma currently faced by global central banks: inflation stickiness is higher than expected, but economic growth momentum is weakening, and monetary policy space is narrowing. It is in this "stagflationary" macro environment that gold continues to attract capital inflows.

The ECB's Balancing Act

The ECB specifically noted in its statement that the outlook for energy prices is highly volatile, and the inflationary impact from the Middle East conflict has not yet fully materialized. Although energy prices in June were close to the baseline forecast, uncertainty remains high, and the central bank needs to closely monitor the intensity and duration of the shocks. This implies that even as the European economy faces downside risks, the ECB cannot easily shift to easing—inflation targets remain the primary consideration.

This "hawkish pause" effectively raises the neutral real interest rate, which should theoretically suppress gold. However, gold prices have remained resilient, partly because the market has already priced in the interest rate path. More importantly, the core variable currently driving gold pricing is no longer nominal interest rates, but rather the restructuring of the global reserve currency system and the surge in central bank gold purchases.

Gold's "New Anchor": Central Bank Reserve Diversification

From a macroeconomic cycle perspective, gold is in the early stages of a long-term bull market:

• Accelerating de-dollarization trends: Geopolitical conflicts and concerns over the "weaponization" of the dollar have prompted many central banks to reduce their dollar reserve holdings and increase gold holdings instead. According to the World Gold Council, global central bank annual gold purchases have exceeded 1,000 tonnes for the past two years, setting new historical records.
• Desensitization to real rate expectations: Although the Fed and ECB maintain high interest rates, market pricing for rate cuts by the end of 2025 is becoming increasingly clear. Once the rate-cutting cycle begins, real interest rates will decline rapidly, and the holding cost of gold, a zero-yield asset, will fall significantly.
• Monetization of fiscal deficits: Major global economies have high debt levels, and fiscal sustainability is a growing long-term concern. Gold, as an ultimate asset free of sovereign credit risk, is highlighting its function as a hedge against sovereign default risk.

Short-Term Fluctuations, Long-Term Trend Unchanged

In the short term, a stronger dollar or a rebound in risk appetite could lead to a pullback in gold prices. However, the $4,000/oz level and below have formed a solid demand floor—this price corresponds to the concentrated buying threshold of emerging market central banks and the cost support for some mining companies.

Looking ahead to the next two quarters, the core driver of gold prices will shift from interest rate expectations to the degree of inflation stickiness and the pace of central bank reserve adjustments.Looking ahead to the next two quarters, the core driver of gold prices will shift from interest rate expectations to the degree of inflation stickiness and the pace of central bank reserve adjustments. If the situation in the Middle East pushes up oil prices, a second rise in global inflation will force central banks to maintain high interest rates for longer, which will instead exacerbate the risk of "stagflation" and ultimately increase gold's safe-haven premium.

The ECB's "inaction" precisely highlights the fragility of the global monetary system: when interest rates are already in restrictive territory and inflation remains above target, gold becomes the only asset that requires no "decision." This macroeconomic logic is the true foundation for gold's continued strength.