Flying high mid-July
Following a small drop in June, gold posted a strong monthly gain in July to finish 4% higher at US$2,426/oz. Another all-time high was reached mid-month before a modest decline into month end. A strong Japanese yen rally, likely fuelled by a carry trade unwind, ensured it was the only major currency in which gold did not gain during the month (Table 1)
According to our Gold Return Attribution Model (GRAM), gold was propelled higher by lower 10-year Treasury yields and, to a lesser extent, a weaker US dollar (Chart 1). The main negative contribution came from COMEX futures, where an increase in open interest was larger than the increase in net longs, leading to a decrease in the ratio – one of our model inputs.
Early August saw the third highest spike in implied equity volatility (VIX) on record as a confluence of factors including a Bank of Japan hike, de-levering and weak US employment data drove indices sharply lower. Some of the ground has since been made up, but a return to pre-selloff exposure might take time.
July review
Gold staged a strong comeback following June’s decline hitting an all-time high of US$2,480/oz mid-month, driven primarily by weaker bond yields and US dollar.
Looking ahead
Seasonality favours gold in August but crosswinds from Jackson Hole, the US elections, tech earnings are likely to be strong.
Chart 1: Rates and US dollar return to the driving seat in July
Multifactor model detailing attribution of gold’s drivers on its monthly returns*
Chart 1: Rates and US dollar return to the driving seat in July
Multifactor model detailing attribution of gold’s drivers on its monthly returns*
Chart 1: Rates and US dollar return to the driving seat in July
Multifactor model detailing attribution of gold’s drivers on its monthly returns*
*Data to 31 July 2024. Our Gold Return Attribution Model (GRAM) is a multiple regression model of monthly gold price returns, which we group into four key thematic driver categories of gold’s performance: economic expansion, risk & uncertainty, opportunity cost, and momentum. These themes capture motives behind gold demand; most importantly, investment demand, which is considered the marginal driver of gold price returns in the short run. ‘Unexplained’ represents the percentage change in the gold price that is not explained by factors already included. Results shown here are based on analysis covering an estimation period from February 2007 to July 2024.
Source: Bloomberg, World Gold Council
Sources:
Bloomberg,
World Gold Council; Disclaimer
Data to 31 July 2024. Our Gold Return Attribution Model (GRAM) is a multiple regression model of monthly gold price returns, which we group into four key thematic driver categories of gold’s performance: economic expansion, risk & uncertainty, opportunity cost, and momentum. These themes capture motives behind gold demand; most importantly, investment demand, which is considered the marginal driver of gold price returns in the short run. ‘Unexplained’ represents the percentage change in the gold price that is not explained by factors already included. Results shown here are based on analysis covering an estimation period from February 2007 to July 2024.
Table 1: Gold’s strong y-t-d performance continued through July
Performance of gold in various currencies*
| |
USD (oz) |
EUR (oz) |
JPY (g) |
GBP (oz) |
CAD (oz) |
CHF (oz) |
INR (10g) |
RMB (g) |
TRY (oz) |
AUD (oz) |
|
July price
|
2,426 |
2,245 |
11,745 |
1,890 |
3,350 |
2,136 |
65,314 |
564 |
80,347 |
3,715 |
|
July return
|
4.1% |
3.2% |
-2.6% |
2.5% |
5.1% |
2.0% |
4.5% |
3.5% |
5.2% |
6.3% |
|
Y-t-d return
|
16.7% |
19.2% |
24.6% |
15.8% |
21.7% |
22.2% |
17.5% |
18.8% |
30.9% |
21.8% |
*Data to 31 July 2024. Based on the LBMA Gold Price PM in USD, expressed in local currencies.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Looking ahead
August has typically been kind to gold, aided by weakness in bond yields. But seasonal tailwinds are up against powerful cross currents:
- Jackson Hole: market positioning is turning increasingly dovish following recent weak US data prints. However, the one-sided bet on cuts leaves some room for disappointment, given a still healthy economy and the Fed’s historical reticence ahead of elections. This could translate to a downside risk for gold should the Fed language not deliver as the market expects.
- US politics and the Democratic National Congress: Polls have shifted dramatically with the Republican poll lead almost eviscerated. But both parties’ policies are likely gold friendly.
- Market volatility: A market sell-off initiated by Q2 earnings disappointments from US tech leaders might accelerate in late August when Nvidia, the AI darling, reports. Gold could continue to benefit, as it has thus far.
Jackson 'Hope'
Jackson Hole hosts the 47th annual symposium (August 22-24) and comes just weeks before the first expected cut(s) by the Fed (September 18). Language will be key as will data leading up to the event. The 31 July FOMC meeting appeared to embolden that a cutting cycle will start in September.1 Confidence can also be derived from the fact that the Fed very rarely likes to surprise, outside of an exogenous shock.
Yet there is always the risk that the data doesn’t play ball. The last few weeks have seen a seesawing of data - alongside huge volatility in equities - with good retail sales, strong GDP and PCE inflation data, as well as PMIs (from S&P) firmly in expansion territory. But this was followed by much weaker data from the ISM as well as softer non-farm payrolls, leaving a measure of uncertainty on the table.
For gold, the symposium has – on average over the last decade – been followed by initial strength then a weakening a few weeks later as bond yields have tended to trend higher (Chart 2).
Chart 2: Seasonal strength in gold unwinds on average post Jackson Hole
Chart 2: Seasonal strength in gold unwinds on average post Jackson Hole
Chart 2: Seasonal strength in gold unwinds on average post Jackson Hole
Daily data during a 60-day period surrounding Jackson Hole events since 2004.
Source: Bloomberg, World Gold Council
Data as of 5 August 2024.
These trends may, however, also reflect a small unwind from the previous month.
Since the Fed pivot in late December 2023, the Street and broader media have continued to clamour for rate cuts, likely reflecting on one hand a desire to keep the risk-asset party going, and on the other, concerns that the Fed is once again falling behind the curve.
Current pricing leaves little room for disappointment. Following the weak August data prints, two cuts are now priced with almost 100% certainty, according to the CME. Speculative positioning in 2-year and 10-year Treasury futures are at multi-year highs.2 Equities have delivered a stellar expansion in valuations so far this year and we don’t know whether the current pullback will be material. Gold net long positioning is not extreme, but it’s reasonably high.
It appears that the Fed has historically been reticent in delivering on expectations ahead of elections, perhaps in an attempt to ward off accusations of political interference.3
A small measure of caution is therefore warranted. If speeches at Jackson Hole hint that expectations are too dovish; equities, bonds and gold are at risk of a downward lurch.
Tables turn in US elections
Since President Biden stepped aside for Kamala Harris to carry the torch as the Democratic candidate, polls have dramatically tightened and some forecasts now favour a Democrat victory (Chart 3).4
Chart 3: Presidential predictions have reversed
Chart 3: Presidential predictions have reversed
Chart 3: Presidential predictions have reversed
Data as of 5 August 2024.
Source: Predictit via Bloomberg
Data as of 5 August 2024.
Gold’s typical reaction to elections is detailed in our recent note. But how might it be different this time as we head towards the Democratic National Congress on 19 August?
The distinction between policies is not as clear as it has been historically. The fiscal largesse of which Democrats are normally accused is likely to be similar under a Trump administration.5 To boot, under Trump, materially higher tariffs, preference for a weaker US dollar and anti-immigration are some of the policies that present upside risks to inflation and downside risks to growth.6
Our view is that gold is likely to benefit from uncertainty more than any political proclivity, and the running mate (VP) confirmation for Harris, is likely to further stir the pot. Post the election, the level of national debt and deficit will probably continue to concern investors and keep interest in gold high.
Make or break for tech stocks?
Stocks have come under pressure recently. Q2 earnings for Nvidia, the AI darling and top performer of US equity markets, will be released at the end of August and will cap some poor results from other sector leaders alongside the recent sell off in other indices.
For the first time in a while, the market appears nervous. Despite an expectations-beating Q1, two events have dampened the euphoria: a large sale of stock by the CEO Jen-Hsun Huang in June and July, and poorly received guidance from Tesla, Google, Amazon and Intel. NVDAs share price has dropped 28% since peaking in June, while the Nasdaq composite is 12% off its July highs (as of 5 August). Nvidia’s earnings call could be make or break for stocks.
While September is typically the seasonally weak period for US equities, August tends to be flat with lower volumes as traders head on holiday. So far this year, August appears to be front-running September weakness. Gold’s typically strong negative correlation during equity sell offs should sustain investor interest and their capacity to respond will likely remain, given that positioning isn’t stretched. So far it has done its job (Chart 4).
Chart 4: Gold doing its job during an equity sell off
Chart 4: Gold doing its job during an equity sell off
Chart 4: Gold doing its job during an equity sell off
Data as of 5 August 2024. Returns indexed to 10 July 2024.
Source: Bloomberg, World Gold Council
Sources:
Bloomberg,
World Gold Council; Disclaimer
Data as of 5 August 2024. Returns indexed to 10 July 2024.
In summary
August’s seasonal strength in gold might be influenced by some specific events this month, including US election developments, the Jackson Hole Symposium and Nvidia’s earnings call, even as the current equity rout is playing out in favour of gold. Our take is that these events will keep uncertainty high rather than providing any definitive resolution. The gold market might also get some support from Indian buying following the recent duty cut.
The start of Fed rate cuts is largely premised on normalising economic data. While the employment report and ISM data surprised to the downside, other data has come in quite hot. Suffice to say, the type of economic landing we can expect remains unclear, as such markets pricing two cuts with almost 100% certainty has its risks; for risk assets but also bonds and gold.
The US election story will continue to garner enormous media interest. While the Democrats look to have turned the tide, there is plenty of time before voting and events can turn on a dime. Policy distinctions are less clear between parties than they have been in the past, but the national debt and deficit will continue to make investors nervous.
Finally, the equity market volatility experienced in early August following a tech sell off in July may linger until Nvidia reports at the end of the month. It caps a poorly received Q2 for the sector responsible for the bulk of US equity gains this year. To boot, volumes tend to be lower in August which could exacerbate market moves. For gold, elevated uncertainty and event risk is likely to keep interest from investors high. So far, it has done a good job in protecting portfolios.
Footnotes
Since then, weak non-farm payrolls and a cratering USD/JPY carry trade have raised the market-based probability that the Fed will cut twice in September to 98% (CME Fedwatch tool as of 5 August).
Leveraged Fund net longs from the CFTC are at their highest since 2006 for the 2-year Treasury future and since 2011 for the 10-year future. CTA flows into 2-year futures are at a four-year high according to VandaResearch.
PowerPoint Presentation (mufgamericas.com); The Fed in Election Years—Three Observations from Recent History | Western Asset
CNN Poll: Harris improves on Biden’s performance against Trump in early look at new matchup | CNN Politics
US Treasury total public debt rose by an annualised 5.4% under the 2017-2021 Trump administration until COVID hit, and 8.6% over the whole term. Under the 2021-2024 Biden administration, growth in debt has been 6.8% annualised.
Gold, not dollar, is the best Trump trade, survey Shows (deccanherald.com)
