Recently, the World Gold Council (WGC) published the Gold Market Commentary, It’s always the quiet ones! WGC said, flying high in August! Following a strong monthly increase in July, gold posted another healthy gain in August to finish 3.6% higher at US$2,513/oz.
It also reached a new all-time on 20 August before a very marginal decline into month end. According to our Gold Return Attribution Model (GRAM), gold was pulled higher by a material drop in the US dollar and, to a lesser extent, lower 10-year Treasury yields as the Fed signalled the time had come for rate cuts.
The main identifiable negative contribution came from a momentum factor, the gold return in the previous month, i.e. when high, the following month typically sees a lower return and vice versa. Also of note in August, the significant cut in import duty on gold in India, which took place in late July, has been a shot in the arm for gold demand in the country.
Anecdotal reports suggest the duty reduction was followed by strong buying interest from jewellery retailers as well as consumers. Meanwhile, global physically-backed gold ETFs extended their inflow streak to four months.
Western funds once again contributed the lion’s share of flows.
In the context of time ahead, the WGC said, the current macro environment is tough to read due to the swirl of contradictory economic data releases, arguably the pivotal US election is adding to the uncertainty and has likely fostered an increase in investors expressing their view through options markets.
Gold spreading, positions in options, a normally quieter corner of the gold market, are at a multi-year high, suggesting that investors are either hedging or speculating on both a rate-cutting cycle and the outcome of the US election. Strong activity in gold options spread trades likely reflect a shift in expectations for interest rates and election risks in H2.
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