Recently World Gold Council (WGC) published their Gold Market Commentary & said, Q4 turbulence ahead! By summarising the last month the WGC reported that, the gold price oscillated between US$1,900 and US$1,950 for most of September until a sharp dip on the 27th took the price to US$1,871 finish and a 3.7% m/m loss. A strong US dollar during the month led to more modest m/m drops in EUR, JPY and GBP.
Our gold model GRAM suggests that gold’s downdraft was largely the result of higher opportunity costs, as the US 10-year yield gained almost 50bps during the month. US dollar strength, with a 2.5% rise in the DXY index also contributed. On a weekly frequency (not shown here), our GRAM model suggests that opportunity cost was insufficiently strong to explain the late-month price drop.
In our view the following factors were at play: an overreaction to strong US Capital and Durable Goods data released on 27th September; A large drop in the China domestic gold price premium. And we can’t rule out technical triggering of limit orders as gold broke through US$1,900 and saw its 50-day moving average cross the 200-day moving average – sometimes viewed as a trend change signal.
Global gold ETFs saw further outflows in September to the tune of US$3bn(-59t), balanced between North American and European funds, while COMEX gold futures managed money net longs shed US$4bn(70t).
By looking ahead the WGC report said, Bond yields continue to rage higher, as central banks, led by the Fed, are defiantly resisting a pivot in the near future, and higher supply chases reluctant demand. At the same time underlying economic conditions remain buoyant so a soft landing is still the consensus outcome. The cocktail of economic resilience and rising yields is likely to bring continued turbulence to gold.
Yet, in our view, gold is more likely to experience choppiness than material weakness as support from a number of factors remains, including a poor risk reward for equities, rising recession risk over the next 6-12 months, inflation volatility and central bank buying Opportunity in gold from a short squeeze will continue to present itself from COMEX short positions at levels not seen since March 2023 and persistent ETF outflows.
Yields, led by US Treasuries, are on the march. The US 10-year TIPS yield, historically closely linked to gold, has breached 2.3% for the first time in 15 years. This is territory that, combined with a rising US dollar3, has previously proven to be challenging for gold. While August’s run-up in yields was probably driven as much by supply and demand as fundamentals, monetary policy is likely back in the driving seat and has been steadfastly hawkish over the past few weeks.
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