The World Gold Council (WGC) reports that the value of gold fell by 3.5% in July as a result of a strong dollar and flat demand in the first half of the month, leaving it down 2.9% for the year to date, at $1 753/oz.
However, softer inflation expectations mid-month and jobless claims a few days later in the US nudged the dollar and real rates down – these reversals also coincided with extended positioning in futures markets for currencies, gold and to a lesser extent, rates.
The WGC’s Gold Return Attribution Model suggests that gold’s performance was influenced by momentum, risk and uncertainty, foreign exchange opportunity cost and rates opportunity cost.
On the momentum side, the WGC reveals that significant outflows from global gold exchange-traded funds (ETFs) and a further drop in gold futures positioning, reached net short for only the fifth time since the series was introduced.
As for risk and uncertainty, the WGC says weaker brent crude prices on softer growth data and lower implied volatility also contributed to gold’s weakness, while continued dollar strength also served to lower value.
Nonetheless, falling bond yields, on weaker growth expectations in the latter part of July provided a boost to gold.
Looking ahead, the WGC reports that, despite an unusually large interest rate hike of more than 75 basis points in the US, and consistently firm language on inflation, future data dependence against forward guidance and the slim potential for a slower pace of hikes towards the end of the year, resulted in some of the strongest one-day rallies of gold since 2020.
Further, the WGC states that, as per the most recent Bank Of America fund manager survey’s painting sentiment as “dire”, the proportion of managers willing to take on more risk reached an all-time low.
This survey also pointed towards cash as a share of total portfolio holdings being its highest since 2001. This may present an opportunity for gold, states WGC, as extended positioning in the futures market, coupled with a deployment of these cash allocations, could give a boost to risk-asset inflows in conjunction with a weaker dollar.
However, this could also backfire for markets and test the resolve of the US Federal Reserve, states that WGC.
Looking at the futures market, the WGC highlights that, in the middle of July, managed money positioning in gold futures turned net short for only the fifth time since the series was introduced in 2006.
The council finds futures positioning data a historically useful gauge of speculative sentiment in gold, particularly at the extremes, as net shorts in gold futures have historically been associated with positive gold returns going forward.
For example, the WGC says that, on a three-month horizon, they have been positive 88% of the time, with this figure rising to 95% and 100% on a six-month and 12-month forward basis, respectively.
However, the rarity of a net short means there is only a handful of observations on which to base inference, says the WGC.
Regionally, the WGC reports that China’s gold demand was robust in July, with total holdings in Chinese gold ETFs notably rising, mainly driven by opportunity-buying amid a lower local gold price combined with risk-off sentiment and higher safe-haven demand as the local stock market fell.
In addition, a rising monthly average Shanghai-London gold price spread, elevated physical gold trading volumes at the Shanghai Gold Exchange, and the WGC’s conversations with gold manufacturers all point to stronger wholesale physical gold demand.
In India, retail gold demand remained tepid in July owing to muted rural demand, the wedding season drawing to a close and the higher import duty on gold. Retail demand saw marginal improvement during the third week of the month owing to a correction in the domestic gold price; however consumers held back purchases in expectation of a further correction to come, the WGC says.
Wholesale gold demand in India experienced decent activity as jewellers replenished stocks ahead of the India International Jewellery Show, and this coincided with a correction in the local gold price.
Indian gold ETFs witnessed net outflows of 900 kg in July, while inflows were primarily driven by profit-taking amid a sharp correction in the domestic gold price and expectations of further price weakness.
European gold ETFs sold off during the month, totalling a negative 38 t, led by significant outflows in UK funds.
In the US, Mint data shows that gold coin sales (American Eagle and Buffalo) totalled 104 000 oz in July, below the year-to-date average of 158 000 oz. Annualising current sales suggests that this year could surpass full-year 2021 sales of 1.6-million ounces, reaching an estimate of 1.9-milion ounces – representing the strongest year of sales since 1999.
Gold ETF net outflows totalled 81 t in July, with year-to-date inflows of 153 t ($10.3-billion).
All regions except Asia experienced outflows during July, with North American funds leading the way with 50 t of outflows, followed by European funds with 38 t. Weaker gold performance, a stronger dollar and equity market, along with continued decreases in net long positioning in the futures markets, likely drove these outflows.