- Lower rates and the US Federal Reserve (Fed) comments helped propel gold 4% higher on the month and back to nearly flat on the year1
- August could be the opportune time to position for the historically strong September gold performance
- The opportunity cost of investing in gold continues to improve as the real earnings yield plus the dividend yield of the S&P 500 has reached negative territory for only the second time in 75 years 2
- Recent commentary out of the Fed and ECB suggests the US and possibly other countries may place less emphasis on inflation and more on employment which could prolong tapering activity
Most asked investor questions:
- Why has gold not reacted more positively with the most recent pullback in yields?
- Is the Fed’s most recent decision and meeting a sign of a longer period of inaction?
- What has been the relationship between gold and cryptos recently?
- How has the gold market evolved during the 50-years since the end of the Gold Standard?
Gold rallied as rates fell sharply
Gold clawed back some of its strong June losses, rallying 4% in July, taking it back near its 2021 average of US$1,800/oz, 3,4 (Chart 10). Gold is now approximately 3% lower on the year, while the US dollar has rallied nearly 3% (Figure 1). A major driver of markets during the month was the sharp decline in yields, with many developed countries seeing yields fall to levels last seen in January or February of this year. This is corroborated by our short-term model, which indicates that key drivers of gold’s performance during July included momentum, and lower Treasury yields (Chart 1).
Lower rates, positive momentum and net long positioning were July gold price drivers
Looking at our short-term model more closely, (Chart 1) our analysis shows the majority of the contribution to positive returns this month came from positive momentum and lower interest rates. Of these, mean reversion in gold prices following June’s crash alongside increased net long positioning drove prices upward from a momentum standpoint. Gold’s performance was also supported by a further decline in US interest rate yields, a prominent over the last few weeks. By the end of July US 10-year yields had fallen almost 50 bps from their y-t-d peak in late March. The decline in yields helped to increase the attractiveness of holding gold, especially considering gold’s heightened sensitivity to rates that we have seen more recently. Moreover, real rates dropped to all-time lows below -1% as yields fell while inflation expectations remained steady. Also, after dipping to 2020 lows in June, net long positioning in gold futures on COMEX rose to US$37bn, equivalent to 640 tonnes (t) –in line with the y-t-d average (Chart 14).5