Gold Market Commentary

Key highlights    

• Gold was marginally down in January, falling less than 1% m-o-m to US$1,795/oz¹
• Rising nominal yields, a stronger dollar, and a more hawkish than expected Fed statement were the primary headwinds for gold during the month
• Global gold ETF inflows of 46t (US$2.7bn) were the highest since May 2021 in tonnage terms

Looking forward

• Monetary policy and inflation rates will remain pivotal for gold in the near term 

Gold shows safe-haven qualities

The LBMA Gold Price PM was marginally down in January, dipping less than 1% to US$1,795/oz. But this provides an incomplete picture of the interesting dynamics seen throughout the month. Despite rising yields and US dollar strength, gold climbed steadily amid equity market turbulence before a monetary policy-induced price drop in the final week of the month erased those earlier gains.

Market expectations of up to four 0.25% Fed rate rises and a reduction in its balance sheet saw nominal yields on 10-year Treasuries rise almost 30 bps to 1.78%, a headwind which failed to stop gold’s rise. From a historical perspective, elevated inflation is keeping real rates at record lows, and pushing investors towards riskier and less liquid assets. But gold fell sharply following the FOMC statement on 26 January, which was more hawkish than expected, confirming that interest rates will likely rise in March, and that no decisions have yet been made on the size or number of rates rises for this year.

This was corroborated by our gold return attribution model (GRAM) (Chart 1). It shows that the rise in Treasury yields was the biggest headwind during the month, but breakeven inflation was also likely a significant drag on gold’s performance. The US 10-year breakeven rate fell from ~2.6% to ~2.4% in January, suggesting market expectations are for a more moderate level of inflation over the long term. US dollar strength was also a headwind for gold, as the dollar index hit its highest level since 2020. However, relative to other mainstream assets, gold’s performance in January was fairly robust (Chart 2).

Gold also benefitted from some supportive factors in the month. Increased buying of physically-backed gold ETFs was a notable shift in sentiment. Globally, gold ETFs saw inflows of 46t (US$2.7bn) in January, the highest monthly tonnage increase in holdings since May 2021, with these flows being particularly concentrated in US-listed funds. And increased geopolitical risk, due to rising tension between NATO members and Russia over Ukraine, helped keep uncertainty high. Gold tends to be supported when geopolitical tensions escalate and is another reason why gold is a good diversifier in any portfolio.

There was a noticeable pick-up in gold’s daily trading average during the month, with greater OTC and COMEX volumes contributing to this rise (Chart 3). Volumes rose to US$139bn per day in January, up 71% m-o-m and 7% higher than the 2021 average. Net long COMEX positioning fell to 590t (US$34bn) following the Fed announcement – its lowest level since the end of September.

Looking ahead: Interest and inflation rates will remain pivotal for gold

Gold has regained some ground in the first few days of February, returning to around the US$1,800/oz level as the initial reaction to the recent Fed statement cooled. Analysis of previous tightening cycles shows that tightening has tended not to be as aggressive as initially expected. However, the strong January US employment report, in conjunction with a hefty upward revision to December estimates, has left the door open to more aggressive tightening from the Fed in the near term.

Equally, with the Bank of England narrowly voting (5:4) to raise interest rates a further 0.25% in early February, versus a 0.5% rise, this could create further pressure for gold in local markets. Similar questions will be asked of the European Central Bank too. With a record 5.1% CPI print for January, it is facing greater pressure to respond to the threat of inflation in the eurozone. It's worth noting that not all central banks are looking to increase policy rates any time soon, most notably China. More broadly, we believe investors will continue to focus on both the speed of upcoming interest rate rises and the dark cloud prospects of persistent high inflation. Gold’s ability to move meaningfully in either direction will, in the short term, depend on whether investors are more concerned about inflation not cooling off or interest rates increasing more rapidly than expected.

Similarly, gold’s short-term technicals are somewhat unclear, but a healthy uptrend in the broad dollar index as well as the 10-year US Treasury yield may act as a tether. Given the recent mixed market sentiment towards gold, flows into gold ETFs and COMEX positioning will be important indicators to watch in our view. 

Regional insights

China: Physical gold demand began the year strongly. The average trading volume of the Au9999 contract, a proxy for local physical gold demand, rose above 20t for the first time since June 2019 and 39% higher y-o-y. Seasonal strength ahead of the Chinese New Year (CNY) was among the main drivers.²  As a result of the robust physical gold demand, the Shanghai-London gold price spread averaged US$6.3/oz, above the 2021 annual average. Local gold ETF investors reduced their holdings by 8t during the month, ahead of the market being closed in the first week of February for CNY.

India: Retail demand remained soft in January due to the reintroduction of COVID restrictions and a lack of auspicious wedding dates.³  This pushed the local market into a US$1-2/oz discount, which widened to US$2-3oz by month-end. A sideways local gold price and expectations of tax changes for gold in the Union budget on 1 February (there was subsequently no change in the tax rate for gold) kept bullion offtake depressed. But retail demand is expected to improve in February on the back of falling COVID cases and a moderation in the gold price.

Indian gold ETFs saw one tonne of outflows in January, primarily driven by rising 10-year Indian government bond yields and expectations of a more hawkish Fed stance. Total gold holdings stood at 37t by the end of January.

US coin sales: American Eagle coin sales amounted to 181,500oz (US$326mn) during the month, the third highest January total on record (Chart 4).⁴  This follows 2021 sales of 1.2m oz (US$2.3bn), the highest annual volume since 2009.⁵ 

ETFs: Gold ETFs added 46t (US$2.7bn) to global AUM in January, the largest monthly tonnage inflows since May (Table 1).⁶  Inflows were heavily concentrated in the largest North American funds, with a small increase in European fund holdings. This outweighed the outflows in Asia, primarily driven by Chinese ETFs. Global holdings stood at 3,616t (US$209bn) at the end of the month.⁷