Monthly gold update

Gold: Spotlight on August’s performance

Gold ended August at US$2,503, up 2.3% to set yet another record month-end price. Declines in both the US Dollar and Treasury yields supported the precious metal, and economic data released in the month seemed to have paved the way for the first Fed interest rate cut in September, an event that could attract further investor demand for gold including into exchange-traded products (ETPs). August was the third-straight month of net inflows into gold-backed ETPs globally, albeit in relatively modest amounts¹. Gold has appreciated 21.3% so far in 2024, making it one of the year’s best-performing assets.

Gold couldn’t escape the widespread market sell-off that started at the end of July and carried through to the first week of August, as many investors scrambled to unwind positions on the yen carry trade. The gold price traded down towards US$2,380 but, as was seen in equities, recovered quickly and spent the rest of the month pushing significantly higher. After finding little resistance at US$2,500, gold would eventually set a new intra-day record of US$2,531 on 27 August.

The primary catalyst for the most recent surge in the gold price was from Fed rate cut expectations. August’s data seems to have ticked the final boxes for the Fed to finally cut interest rates in September, with the only question being the magnitude of that first cut. With reports continuing to ease any lingering inflation concerns, and the labour market showing signs of cooling, the market is pricing in a 66% probability of a 25 basis-point (bp) cut. The other 34% chance is based on the Fed having waited too long and cutting by 50 bps, which now seems unlikely, although any shock in the next batch of employment data could bring a larger cut back into play. 

At the Federal Reserve’s annual Jackson Hole Economic Symposium, Chair Powell gave a clear signal that the Fed would cut rates when it meets on 17-18 September. He also indicated the Fed stood ready to protect the US jobs market from further weakness after the largest-ever revision was announced by the Bureau of Labor Statistics just before the symposium got underway (818,000 fewer jobs were added to the economy than had been reported for the 12 months ending in March 2024). According to Powell, “The upside risks to inflation have diminished, and the downside risks to employment have increased.” 

Real yields ended the month at 1.75%, having recovered in the last week following an intra-month low of 1.67%. In nominal terms, the 2-year Treasury yield dipped below 3.9% to its lowest level since March 2023. The 10yr-2yr constant maturity yield differential is now back to flat, having been negative since July 2022. Negative values have often preceded recessions, while positive values imply future economic growth. The bond market could be providing yet another sign that investors believe the US economy will manage a soft landing.

US real GDP was revised upward for Q2 to an annualised 3.0%², from the initial 2.8%, and was a far cry better than the 1.4% recorded in Q1. The improvement in Q2 was largely due to increases in private inventory investment and consumer spending, which more than offset the negative impact of the trade balance (both higher imports and lower exports in the period). The consumer also accounted for the majority of the upward revision to the initial estimate. 

The month ended with the release of the Personal Consumption Expenditures (PCE) price index showing the Fed’s preferred measurement of inflation in-line with market expectations, rising 0.2% in July for a 2.5% increase on the year. Core PCE was 2.6% on a 12-month basis, slightly below the expected 2.7%. Shelter continues to be the stickiest component, up 0.4% in July.

The US Dollar, as measured by the DXY index, fell 2.3% through August, although it firmed somewhat in the final few days of the month as data suggested the US economy could be able to avoid a hard landing. The DXY index reached its lowest level since July 2023, driven by the combination of USD weakness (with the Fed anticipated to begin cutting rates) and JPY strength (with the Bank of Japan raising rates in July for the first time since 2007 and suggesting more hikes could follow). As gold is priced generally in USD, a weaker Dollar makes it relatively less expensive for non-USD buyers.

Outside of economic drivers, gold has also been supported by recent escalations in the conflicts in both the Middle East and Ukraine, with investors seeking perceived “safe haven” assets. 

Keep an eye on …

US employment data ahead of the Fed’s next meeting in September, which could offer greater clarity on whether the first rate cut is likely to be 25 or 50 basis points;

The first debate between Trump and Harris for indications on how their respective policies could impact gold-related factors such as the USD, as well as which candidate gains in the following polls;

Whether demand for gold-backed ETPs picks up after the (presumed) Fed rate cut.