A weaker dollar and a spike in breakeven inflation rates has helped gold to gain 3.1% in July to $1 971, bringing the year-to-date return to 8.7%, says the World Gold Council (WGC).

Global gold-exchange traded funds (ETFs) saw outflows of 32 t, evenly distributed between Europe and North America; however, 93 t of mostly new longs pushed Comex managed money net long positions to 362 t.

The WGC says risk factors were the primary drivers of gold’s gain in July.

“Of these, a sharp rise in breakeven rates on the back of stronger-than-expected economic data was key. However, this move suggests a conundrum.

“Growth data has been stronger and inflation data has been weaker, yet the rise in breakevens was the result of stronger nominal yields – not real yields – suggesting the bond market sees ‘good’ data merely as inflationary rather than growth-inducing,” the WGC explains.

The organisation adds this appears to be indicative of the rift between the equity market narrative of a soft landing and the bond market narrative of an eventual hard landing.

WGC elaborates that a weaker dollar helped drive gold higher in the month, adding 1.2% to the monthly return, but treasury yields and ETF outflows nonetheless held gold back.

Looking ahead, the WGC says August has historically been a strong month for gold returns, however, the factors that typically drive strong demand for gold are likely to be absent this time around.

Some of the factors weighing on gold demand are high local gold prices and a soft underlying economic environment in India and China, and equity markets having managed to deflect weakening fundamentals, poor internals and high retail sentiment in the first half of the year, so they might arguably weather weak seasonals too, which may reduce the demand for gold hedges.

WGC adds that longer-term US Treasury yields are more likely to tick up that 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 $1.3-trillion by year-end.

The council adds that firm nominal yields and rising real yields, as inflation drops, might curtail investment demand for gold (without triggering large scale disinvestment).

However, the WGC has 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.

Some of the factors that could drive gold demand is that of the Bank of Japan deciding to relax its yield curve control policy, which could ignite volatility and push down the US dollar, as well as the risk of a second wave of inflation in the US.

Overall, while August may not be as gold-friendly as it has been in the past, there are good reasons as to why support for gold will establish itself later in the year.

WGC maintains its outlook that upside looks more probably than downside for gold in the current environment.

For example, while stocks have weathered plenty of headwinds so far with some emerging fundamental support, sentiment and valuation still appear elevated.

Economic risks also remain firmly on the table, despite a sentiment shift over the last few weeks.

The US debt ratings downgrade, alongside the announcement of a huge extension to government borrowing is the latest in a slew of datapoints that are indicating trouble ahead, including commercial and industrial loan demand; credit spreads; US state and local income tax receipts; real average weekly earnings; bankruptcy filings; weekly same store sales; and real weekly retail sales, among others.