In the Gold Market Commentary, World Gold Council (WGC) said about, all aboard the rate cut train! WGC said, “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.
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. 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.
Now, August has typically been kind to gold, aided by weakness in bond yields. But seasonal tailwinds are up against powerful cross currents,
1: 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.
2: 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.
3: 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.
