The gold price rose 5.2% in July, ending at the highest month-end price on record
Drivers included a fall in real bond yields and weaker US dollar, with the Fed looking certain to cut rates in September
Demand for gold exchange-traded products is worth keeping an eye on in the near future
Gold ended July at US$2,448, up 5.2% to set a new record month-end price. The traditional relationships with USD strength and US real yields reasserted themselves as ETF investors returned to the asset class.
Source: Bloomberg, as at 1 August 2024. Past performance does not predict future returns.
Gold registered a new all-time high of $2,484 intra-day 17 July not only a reaction to the traditional drivers of dollar strength and US real yields, but drawing closer to the US Presidential Election is increasing political risk. Gold peaked slightly after Trump registered his highest lead against Biden (15 July, roughly a week before the end of Biden’s re-election campaign) but it is specifically Trump’s preference for a weaker USD that is a positive signal for gold. Concerns of escalations in the Middle East further added to political risk at month-end, a dynamic that usually benefits gold.
Gold did come back from its record high level reaccelerating to set a new month-end high of $2,448. As Fed rate cuts come more into focus there have been inflows into gold-backed ETFs. Total known holdings of gold by ETFs increased 1.8% to 82.5 million troy ounces, the highest level for five months. There have been significant outflows from gold-ETFs since 2020, despite the climb in the gold price, and that the ETF demand segment is picking up could be a bullish sign for gold.
Year-to-date the gold price has appreciated 18.9%.
Keep an eye on … trending ETF demand.
In our recent Quarterly Gold Supply and Demand report (Q2 2024) we noted that albeit overall gold demand was down, there was a pickup in interest in the ETF segment, specifically within European-based gold exchange-traded products. Superior chips required to support the nascent AI demand was also causing an increase in demand for the metal.
Q2 typically sees lower demand for gold in the biggest demand sector: jewellery. This is due to the seasonality of Asian gifting, but the record prices gold has been setting is also going to influence price-sensitive customers. Investors motivated by monetary policy factors are likely to be attracted to gold by the direction it would be expected to move in with a Fed rate cut on the horizon.
Source: Bloomberg, as at 1 August 2024. Generic Inflation Index US 10-year government bond or real yield on generic 10-year TIPS (TIPS = Treasury Inflation Protected Security).
Real yields fell to 1.8% by the end of July, their lowest level since Q1 2024 on concerns of the strength in the US economy causing investors to seek shelter in gold. US labour costs fell more than expected in Q2, US firms added their fewest numbers of workers this year and wage growth slowed as per the ADP report. The Fed has highlighted the “unhealthy” US employment sector as a key reason why it has needed to persist with higher rates. That this picture is changing is encouraging for a rate cut; Chair Powell has said the Fed could cut rates as early as September.
Although the Fed Funds rate was kept at 5.5% through the month, market pricing for a rate cut in September moved from a 68% likelihood to above 100%, i.e., a certainty. Alongside the increasing number of economic indicators pointing to a weaker US economy, the inflation backdrop is also supporting a US rate cut. US CPI for June was weaker than expected (3.0% year-on-year versus the expected 3.1%) and lower price increases are forecast into year-end.
Keep an eye on … the changing speed at which the market is pricing US rate cuts.
Source: Bloomberg, as at 1 August 2024.
The USD fell 1.7% through July as measured by the DXY index. As well as markets becoming increasingly convinced the Fed would execute its first rate cut of this cycle in September, markets moved to expect three rate cuts into year-end, from two at the start of the month. This additional rate cut caused further dollar weakness giving support to the gold price.
Narrowing interest rate differentials did bring some USD weakness, but also the prospect of Donald Trump winning the US Presidency is causing dollar weakness in response to expected policy changes.
Keep an eye on … Trump’s language around his policy for a weaker USD.
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1 Gold price shown in US Dollars unless stated otherwise.
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Data as at 1 August 2024 unless otherwise stated. Source: Bloomberg.
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