Gold Market Commentary

Rates and the dollar further pushed gold down in August

August highlights

• Gold fell 2% in August, as higher yields and a stronger dollar continued to exert pressure
• Managed money net positioning in gold turned positive during the month, while global gold ETF outflows of 51t (US$2.9bn) were lower than July’s

Looking ahead

• Gold could remain under pressure if the central banks continue to hike aggressively, but the risk of either stagflation or outright recession could offset this, as gold has historically outperformed in such environments
• Near-term, we expect trading volumes and consumer demand to pick up in September

Gold’s tough summer

Gold ended August lower m-o-m, down 2% to US$1,715.9/oz – its fifth consecutive monthly decline.¹ The promising bounce that began in mid-July ran out of steam in mid-August after failing to break the US$1,800/oz resistance level. This performance came against a backdrop of continued higher yields and a stronger US dollar as the US Fed reaffirmed its commitment to further tightening. Year-to-date, gold is now down 5% in US dollar terms, although it continues to fare better in other currencies, benefiting non-US investors (Table 1). Nonetheless, gold remains one of the top performing assets this year.

The headwinds facing gold are highlighted by our Gold Return Attribution Model (GRAM), which suggests that its performance in August was most negatively impacted by opportunity cost drivers – yields and the US dollar. Momentum factors provided some relief (Chart 1).

Managed money net longs totalled 64t at the end of August, reverting from the late July net-short position.² This was driven largely by short covering. Net long positioning remains low on a historical basis. Gold ETFs registered their fourth consecutive month of tonnage outflows in August (-51t, US$2.9bn). But these were lower than the 81t of outflows in July. The slight improvement in gold sentiment was probably helped by the cooler US CPI print for July, which temporarily raised hopes of a Fed pivot. But dovish optimism quickly retreated following the Fed’s resolute anti-inflation statement from Jackson Hole.

Table 1: Gold’s y-t-d performance continues to remain positive in many non-US dollar currencies

As of 31 August 2022. Based on the LBMA Gold Price PM in local currencies: US dollar (USD), euro (EUR), Japanese yen (JPY), pound sterling (GBP), Canadian dollar (CAD), Swiss franc (CHF), Indian rupee (INR), Chinese yuan (RMB), Turkish lira (TRY), and Australian dollar (AUD).

Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Looking ahead

Several Fed policy makers have been clear that despite the cooler inflation reading for July it is too early to “declare victory” in the fight against rising prices and that tighter policy might be in place for some time. The hawkish message was reiterated in Chairman Powell’s remarks at Jackson Hole at the end of August.

In the short term, interest rates in key markets are set to continue higher until central banks – most importantly the Fed – bring inflation closer to target. The Fed will update its monetary policy (dot plot) forecast in September, providing more detail on how policymakers view the future path of interest rates. The European Central Bank and Bank of England, both similarly battling multi-decade high inflation, also have policy meetings in September where further rate hikes are expected. This will likely keep the pressure on gold.

Nonetheless, investors appear reluctant to accept that the US rate-hike cycle will extend beyond year-end: markets are pricing in expectations for the Fed to reverse course in late Q2 2023. This could reflect a belief that either inflation will come down quickly or a deep recession will force a policy rethink. The apparent divergence between market expectations and Fed rhetoric on the path of policy rates highlights uncertainty over the outlook, which may lead to continued volatility across financial markets.

The likelihood of a formal recession in the US, and elsewhere, seems to have materially increased in August.³ Exploratory analysis shows that gold has proven to be one of the best performing assets during US recessions, especially when they have coincided with high inflation. Gold’s median return during such periods has been 0.92%, higher than comparable major asset classes with the exception of US Treasuries and corporate bonds (Chart 2).

This fits neatly with our previous analysis which has shown that gold has historically also performed well during stagflationary conditions. And as inflation is expected to remain elevated for some time due to continued supply chain issues and tight labour markets, this should also provide some support for gold as a hedge going forward.

Trading volumes for gold should pick up in September amid a historically strong seasonal demand period

During the August lull volumes fell to US$109bn per day, well below July levels (US$149bn) and the Q2 monthly average (US$126bn). We’ll continue to watch futures positioning and ETF flows – both key higher-frequency indicators of sentiment towards gold – as market activity picks up. In addition, we expect consumer demand to increase, especially in key markets like India, ahead of a seasonally strong period.

Regional insights

China: The local gold price rebounded in August and, as a consequence, profit taking may have led to the outflows in Chinese gold ETFs during the month (-8t). But local gold consumption may have maintained its July strength – judging by the higher average daily trading volume of Au9999 and the physical gold contract at the Shanghai Gold Exchange, as well as the elevated local gold price premium (over the international price of gold as measured by the LBMA Gold Price AM).

India: Indian retail demand bounced back in August following a seasonally quiet June and July. Jewellery demand picked up ahead of the wedding season in South and North India. A mid-month local gold price correction also acted as a catalyst supporting both wedding and regular purchases. Bar and coin demand also witnessed decent activity, largely thanks to the lower price in the latter part of the month. With a recovery in retail activity, wholesale demand improved and the discount in the local market narrowed to US$5-6/oz by the third week of August, compared to a discount of US$10-12/oz at the end of July.

Europe: Swiss gold exports jumped to 202t in July, more than double June’s 97t (Chart 3) and the highest monthly total since December 2016 (297t). A 147% m-o-m increase in exports to China was the key driver; however, a significant m-o-m rise was seen in most major markets (particularly notable were India, Germany, Thailand, UK and Turkey particularly notable). On a y-t-d basis, Swiss gold exports amounted to 930t, the highest since 2018.

Central banks: Net purchases totalled 37t in July according to the latest data available. Qatar (15t) was the largest buyer in the month, pushing its gold reserves to a record high of 72t. India (13t), Turkey (12t) and Uzbekistan (9t) were the other significant buyers during the month, while Kazakhstan (-11t) was the only major seller.

ETFs: Gold ETFs registered net outflows of 51t (US$2.9bn) in August (Table 2). That was the fourth consecutive month of net outflows but significantly lower than the outflows in July (81t). North American – primarily US – funds accounted for the lion’s share (40t) of global outflows, with European and Asian funds posting more modest tonnage reductions.⁴ Other regions had small inflows. Y-t-d net inflows now total 102t (US$7bn).⁵

Table 2: August 2022 Global ETF flows

*Data to 31 August 2022. On Goldhub, see: Gold-backed ETF flows.

Source: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council

Footnotes

¹ As of 31 August 2022, based on the LBMA Gold Price PM.

² As of 30 August 2022.

³ Bloomberg’s US recession probability forecast increased from 40% to 50% in August. For Europe the same forecast rose to 55% from 45%.

⁴ All value figures based on the LBMA Gold Price PM as of 31 May 2022.

⁵ We regularly review the global gold-backed ETF universe and adjust the list of funds and holdings based on newly available data and information.