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Gold process was capped through July with geopolitics as well as the stronger USD, though recent developments have led to a spurt of demand – US ETFs that have hitherto been sellers have also begun to buy. We continue to expect the Fed to hold rates lower than they normally would, but this effect is blunted by the increase in real long-term yields. There are also indications of physical demand exhaustion at higher prices. The necessity of long-term defence spending and low rates remain a great driver of gold prices higher, though the above factors indicate the path higher might be a long one.
Gold capped through Jul, recovers early Aug.
Gold prices were capped through much of July, with geopolitics, a French court decision to allow opposition politician Le Pen to run for elections, and with Fed speakers indicating hawkishness. However, the FOMC indicated that the bar to rate hikes was still high, and the USD later weakened with stronger Eurozone data and heavy joint US/Japan intervention in the JPY. This led prices to rise sharply in the current week.
Real yields, financial supply driving weaker gold: but physical demand low too
The fiscal dominance and currency debasement study driving gold prices appears to have taken a knock owing to the FOMC and real yields. The FOMC has indicated that the bar to a hike is high, but that to cuts ahead is even higher. Apart from this, very heavy borrowing demand and fiscal spending have led real yields to rise sharply – fiscal dominance involves lower yields. Apart from supply seen in US and then Chinese ETFs, there are also concerns in terms of physical demand. According to the World Gold Council, identifiable demand at 941.8 tonnes in the Jun quarter was the lowest since 2021, but supply remained strong. Weaker demand was largely driven by a drop in both jewellery and gold bars/coins. The latter is seen as a form of physical investment, agreeing with the negative ETF contours.
Expecting a slow crawl higher in gold prices as trends crystallise
We therefore continue to expect further moves higher in gold prices, though with a somewhat slower timeline as fundamentals around money supply and fiscal dominance play out. This has shifted from a short-term momentum-driven process to something more long term, with explicit evidence of fiscal dominance being institutionalised and driven as an active choice, seen in higher than usual inflation and increase in money supply. However, this does not preclude near-term volatility in prices, with a repeat test of USD 4000/troy ounce also possible with a potential resumption of the West Asia conflict.
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