Gold loses sheen in August as economic data shows no sign of slowdown

• Gold prices decline 1% in August as bond yields and the greenback continue to trend higher.
• Prices are unlikely to find support, if the bear steeping trend continues and long-term bond yields remain elevated for a prolonged period of time.
• Near-term trigger for gold prices could come from a sharp increase in demand for physical gold from India and China.
  

Gold is not glittering all that much as central banks continue to hike rates and bond yields continue their upwards trajectory. In August gold prices declined 1% as the dollar continued to strengthen. Gold tends to underperform when long-term yields continue to rise faster than short-term yields. This is known as “a bear steepening”, and it is usually seen during a reflationary or early business cycle period, say experts. While this is good news for economic conditions across the world, it is not so for bullion prices.

According to WGC, the outlook for gold is not looking very promising at present because “bear steepeners” tend to be bullish for risk assets and more challenging for hedge assets like gold, especially during ‘bear +’ periods (a subset of a bear steepener) where long and short rates are both rising together. While everyone expects long-term yields to remain elevated for much longer and data emerging from the US is looking soft, economic slowdown is a reality. In events like these or even when there is a hard landing, gold tends to do well. However, since July gold has declined by 3%.

For the last three straight months, money has flown out of gold ETFs (exchange traded funds). Gold backed ETFs, saw net outflows of $2.5bn in August, with the total AUM falling by 3% to $209bn whilst holdings dropped by 46t to 3,341t. The fall in gold prices in August has been the weakest since February. Global gold ETFs have seen net outflows of $7.5bn year-to-date, with European funds contributing the most. Collective holdings have lost 130t over that time.

Ravindra Rao, Vice President and Head of Commodity Research at Kotak Securities, says: “COMEX gold prices extended previous day’s losses and closed $1944.2 per troy ounce after upbeat economic data from the US boosted the greenback and treasury yields, raising the opportunity cost for holding the yellow metal. The dollar index rose towards 105 levels, while US 10-year yields closed higher at 4.28% after US ISM Services PMI unexpectedly jumped to 54.5 in August 2023.” The services PMI growth is the strongest the US has seen in six months. The jobs data that will emerge from the US this week will be in focus for gold prices.

The outlook for gold continues to be uncertain. The only reason that prices may increase would be due to higher demand for physical gold by India and China. Local wholesale gold demand picked up in China in August by 22% month on month mainly due to Chinese Valentine’s Day during the month. Cumulative inflows into gold backed exchange traded funds were postive too, mainly driven by China.

Gold will only shine if the economic conditions deteriorate very sharply or if demand for the precious metal rises materially in India and China. Gold imports by India were down 24.15% in FY23. According to Rahul Kalantri, vice president Commodities at Mehta Securities: “For short term gold would trade in the range of $1,920-$2,078 either side breakout of the range could give further direction based on FED action. For a longer term if gold breaks and sustains above $2078 then we would see a big upside move that could go till $2,240 & $2,365 levels. In the domestic market, gold might come to levels of Rs 64,500 & Rs66,800.”