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Monthly gold update - August 2023

Invesco monthly gold update

Gold: Spotlight on August’s performance

Gold fell 1.5% in August, ending the month at $1,940. Higher real yields and Fed tightening meant the financial fundamentals exerted downward pressure on gold through the first half of the month but, as US data softened, the metal recovered most of the initial loss.

Gold price during the month

Source: Bloomberg, to 31 August 2023. Past performance does not predict future returns.

The gold price fell below $1,900 into mid-month as there were outflows from gold ETFs. Other sources of gold demand are not measured at such high-frequency, such as central bank reserves and jewellery purchases, but financial fundamentals are of particular importance to gold-backed ETF investors. Gold did recover to end the month at $1,940 as softer US data caused yields to fall.

Physical demand may well support the gold price moving into Q4 as Diwali in November is ahead of the Indian Wedding season. These typically cause spikes in demand though jewellery purchasers are a particularly price-sensitive segment of gold demand, so they may well look to take advantage of price dips such as what we saw in August.

A survey from Bloomberg this month noted money managers are positive on the outlook for gold next year with no respondents replying they are looking to reduce their allocation. Alongside the expected cut in rates, geopolitical tensions as well as diversification benefits of holding gold in an aggregate portfolio are reasons to maintain positions in gold.

This puts gold -1.1% over the last three months but is still up 6.4% year to date.

Keep an eye on … ETF flows.

Gold price and real bond yields

Source: Bloomberg, to 31 July 2023. Past performance does not predict future returns.

Real yields were the key driver for gold in the month, demonstrated by the close trend of the two assets in the chart. Real yields moved up to 1.99% and as the US Treasury is to increase its supply of Treasuries, coupled with a potential lower demand, there were reasonable expectations that yields could move higher still.

The sentiment changed following Jackson Hole as although Fed Chair Powell emphasised that further hikes are still on the table, monetary policy is to remain data dependent. That US data is softening, the market is gaining conviction that the Fed is close to the end of its hiking cycle and this saw real yields fall back to 1.87% at month-end, with the fall in real yields providing support to the gold price.

Keep an eye on … US jobs and inflation data.

Gold price and the US Dollar

Source: Bloomberg, to 31 July 2023. Past performance does not predict future returns.

Month-on-month the USD gained 1.7% as measured by the DXY index. Markets priced in a greater likelihood of another (and final) rate hike by the Fed in November. The Fed is expected to hold steady at this month’s meeting, but this as well as the additional economic data points may cause the USD to strengthen slightly more if the data crystallises the case for another rate hike.

Dollar strength has been more a case of peak rates coming in across other major currencies. The Euro has the largest weight in the DXY index and estimates for the peak ECB rate have fallen through the month. Peak rate estimates for the UK have fallen to a greater extent but sterling has a lower weight in the DXY index (11.9% versus the Euro’s 57.6%). Forecasts for the Bank of Japan’s policy rate come year-end were unchanged month-on-month.

Keep an eye on … FOMC members’ comments on US economic data points.

Investment risks

  • 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.