A strong August not guaranteed: WGC

Aug 12, 2023

According to the Monthly Gold Market Commentary by the World Gold Council (WGC) said, an unseasonal August may lie ahead! A strong August this year is not guaranteed! There are good reasons why we may not experience a strong August this time round and they appear to outweigh the supportive factors.

WGC argues those factors which are Against…

1: High local gold prices and a soft underlying economic environment in India and China suggest a lower appetite for physical gold buying during August.

2: Equity markets have managed to deflect weakening fundamentals, poor internals and high (retail) sentiment in H1, so they might arguably weather weak seasonal too, helped by a strong Q2 earnings season. This may reduce the demand for hedges, partly explaining low implied volatility.

3: But, if investors do want to hedge, the low equity volatility environment has enabled them to acquire out-of-the-money puts at prices not seen since the Global Financial Crisis, with a possible knock-on effect on hedging demand for gold. 4: Longer-term US Treasury yields are more likely to tick up than down in August given a more favourable inflation and growth outlook, potential repatriation of Japanese investment capital, and the US Treasury’s need to refill its coffers by up to US$1.3 trillion by year end.

Firm nominal yields and rising real yields- as inflation drops -might curtail investment demand for gold (without triggering large scale disinvestment). But we have also found that August returns are significantly positive even when controlling for yields and the US dollar. This perhaps puts the onus on yields to have a rampant month to unseat gold from its seasonal trend.

For… are also suggested by the WGC as,

1: While longer maturity yields might rise, the Bank of Japan’s (BoJ) decision to relax its Yield Curve Control (YCC) policy could ignite yield volatility and push down the US dollar – although yield differentials between the US and Europe remain more important. The yen remains attractive given economic resurgence and a strong local equity market. A weaker US dollar and higher volatility are likely to support gold returns.

2: COMEX futures net longs are not extended and ETF outflows have been decelerating, leaving capacity for investment flows to increase on the right catalyst.

3: The risk of a second wave of inflation remains in the US economy, though perhaps not imminently. Forward looking indicators suggest that as real wages rise they could once again ignite prices.

The NFIB small business survey of pricing plans, which closely tracks core PCE inflation, has started to tick up, economic data is surprising on the upside, manufacturing PMIs are trending higher and single-family building permits reached their highest level in a year, suggesting that residential investment may have bottomed. High inflation environments have, historically, almost always come in waves.

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