Strong dollar poses headwinds for gold as ETFs outflows hit $2.9b in August

A two-decade high in the US dollar and higher rates continued to pose headwinds for gold, forcing investors out of the gold market as gold-backed exchange-traded funds (ETF) saw outflows of 51 tonnes last month, valued at $2.9 billion, according to the latest data from the World Gold Council.

While total gold ETF holdings remain 3.6 per cent ($202 billion) higher on the year, with the fourth consecutive month of outflows, funds have now given back two-thirds of the inflows that were accumulated through April, WGC said in a report.

The WGC said outflows came as the price ended August with a 2.0 per cent loss. Gold prices are down 5.0 per cent since the start of the year as 102 tonnes of gold have flowed out of global ETFs. The declines can largely be attributed to hawkish commentary from US Fed officials, which drove two-year rates to levels last seen during the Global Financial Crisis.

"The promising bounce that began in mid-July ran out of steam in mid-August after failing to break the $1,800/oz resistance level. This performance came against a backdrop of continued higher yields and a stronger dollar as the Fed reaffirmed its commitment to further tightening," WGC analysts said in their monthly outlook.

However, precious metal analysts are upbeat that the growing threat of a global recession would continue supporting gold prices. "Exploratory analysis shows that gold has proven to be one of the best-performing assets during US recessions, especially when they have coincided with high inflation," they said.

Gold prices continue to test support just above $1,700 an ounce. However, the prominent line in the sand for many analysts is between $1,680 and $1,675. A drop below this support area could signal an end to gold's multi-year uptrend.

WGC said that despite the growing pessimism, there are still some bright spots in the gold market. Although expectations that the Federal Reserve will pivot on its current tightening cycle have been pushed to later in 2023, it has not gone away.

"Investors appear reluctant to accept that the US rate-hike cycle will extend beyond year-end: markets are pricing in expectations for the Fed to reverse course in late Q2 2023. This could reflect a belief that either inflation will come down quickly or a deep recession will force a policy rethink," analysts said.

Adam Perlaky, a senior analyst at WGC, said gold-backed ETF outflows were widespread in August, as North America, Europe, and Asia all saw capital pulled out of funds, even in the low-cost space. “US funds particularly faced headwinds, as flows among the largest and most liquid funds were correlated with gold price movements, amid a period where the Fed pushed rates to levels last seen during the Global Financial Crisis and the dollar reached highs that we have not observed for nearly 20 years.”

North American-listed funds saw outflows of 40 tonnes and continued to lead the exodus; however, the analysts noted that the outflows were broad-based worldwide.

"Continued hawkish commentary from Fed officials drove two-year rates above the June highs, to levels last seen during the Global Financial Crisis. Nearly all funds in the region experienced outflows, including those in the low-cost space," analysts said.

European-based gold funds saw outflows of 4.7 tonnes, and Asian markets saw outflows of 7.5 tonnes.

The WGC warned investors that the gold market could continue to struggle as central banks, led by the Federal Reserve, aggressively raise interest rates.

Analysts said several Fed policymakers have been clear that despite the cooler inflation reading for July, it is too early to declare victory in the fight against rising prices and that tighter policy might be in place for some time. "In the short term, interest rates in key markets are set to continue higher until central banks – most importantly the Fed – bring inflation closer to target. The European Central Bank and Bank of England, both similarly battling multi-decade high inflation, also have policy meetings in September where further rate hikes are expected. This will likely keep the pressure on gold."

— issacjohn@khaleejtimes.com