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Gold added 2.38% in July ending the month at $1,965. This was the highest month-end close since May as a weaker-than-expected non-farm payrolls as well as CPI print in the US gave weight to the argument the Fed is closer to the end of its hiking cycle.
Source: Bloomberg, to 31 July 2023. Past performance does not predict future returns.
Towards the start of the month, gold fell to $1,911 before rebounding and recovering June’s losses as well. Gold consolidated above the $1,950 level, peaking at $1,979 mid-month, before ending the month at $1,965. This was as major US economic data points curtailed expectations for there to be further rate hikes by the Fed.
The divergence between the gold price and known ETF holdings of gold increased again in July. The usual positive correlation between the two series has broken down in the recent past; the gold price has increased 11.1% since November of last year whereas known ETF holdings of gold has fallen 2.8% over the same period. This suggests that central banks and fabrication demand continues to be supportive – an important point as seasonal demand is about to pick up, specifically the wedding season in India and Diwali.
Year-to-date, gold has added 7.7% to its price, 11.2% over the past 12 months.
Keep an eye on… ETF flows.
Source: Bloomberg, to 31 July 2023. Past performance does not predict future returns.
By the end of July, US real yields were 1.59%, largely unchanged from where they were at the start of the month. Real yields improved from 1.62% to July’s peak of 1.81% before falling back as the non-farm payrolls data print was below both the previous read and expectations. Further to this, US CPI measures of inflation were then also lower than previous and expectations at both headline and core levels.
Currently, expectations are for there to be no further rate hikes in the US. A risk to this view is that inflation is not moderating at a sufficient pace for the Fed. The first rate cut in the US is not forecast until Q1 2024 and, come the end of 2024, forecasts suggest the Fed will have cut 1.25% from the current Fed funds rate of 5.5%. Sentiment is that the US economy is likely to face a soft landing as investors push back their forecasts for a US recession.
Keep an eye on… impact of restrictive US monetary policy.
Source: Bloomberg, to 31 July 2023. Past performance does not predict future returns.
The USD fell again in July, losing another 1.0% as measured by the DXY index, which had a positive impact on the gold price. Even though expectations for the year-end Fed funds rate was marginally higher and consensus did not change month-on-month, that 5.5% will prove to be the peak rate for the US in this rate cycle, forecasts for the first rate cut in the US were brought forward to January 2024 from May 2024 over the course of the month.
The USD was weaker even though, outside of the US, peak-rate expectations have also fallen, notably in the UK but more importantly for the Eurozone, which is a larger share of the DXY basket.
Keep an eye on… a change from hawkish tones outside of the US.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.