Recent Gold Movements |

By John Read*

Gold has fallen more than US$100 an ounce over the past month, with most of the decline occurring over two days last week. After trading quietly around US$1,810/oz during the US Independence Day holiday on July 4, gold fell to around US$1,770/oz on Tuesday, then to around US$1,740/oz on Wednesday, and has fallen further since.

Two major financial indicators seem involved in the movement. First, the US Dollar has strengthened significantly this week, especially considering Bloomberg’s trade-weighted DXY Index as an indicator of US Dollar strength. Economic weakness in Europe, weakness in the yen following Japan’s failure to fight inflation, and political unrest in the UK are among the reasons for the greenback’s strength.

Second, weakness in industrial commodities has been closely associated with the performance of gold. There has been a close correlation between the movements of Crude Oil and Gold over the past few days (Chart 1), but other metals also fell, with copper at levels not seen since late 2020.

Chart 1: Brent and Gold have been trading tightly in recent days

Notes: 10-minute intraday price bars of spot gold and ICE Brent futures. Brent price gaps represent non-trading hours.

Source: Bloomberg, World Gold Council

Recent gold investment flows have been weak. Net long positions in COMEX gold futures have fallen over the past few weeks and as of last Tuesday – the latest data available – net long positions were at their lowest in three years. Most of this movement was due to the arrival of new shorts on the market. And after two consecutive months of net outflows, gold ETFs have seen an additional 25 tonnes of outflows since the start of July.

We believe there are three main underlying reasons for what happened:

  • US economic expectations shifted from extreme concerns about inflation to growing fears of recession, leading to a shift in portfolio positioning. Large-scale commodity index sales have taken place as investors reduce their exposure to commodities overall (Chart 2), which contributed to the weakness in gold.
  • Second, the Fed talks and acts more aggressively than other major central banks, which supports the dollar on expected and realized interest rate differentials. Europe and the UK are struggling with high inflation driven by energy prices rather than domestic demand, so central banks are understandably slow to increase here.
  • Finally, the dynamics of gold played a role. It is likely that speculative traders playing gold in the short term were looking at US$1800 an ounce as a key level and, when that gave way, quickly cut longs or added to shorts. Seasonally, although there is little point in trading anything, gold is often low in the summer, which adds to their negativity on gold and the news of rising tariffs in India will only have reinforced this vision.

Chart 2: Speculative traders have exited commodity positions en masse those last weeks

Notes: Average of net long futures contracts as a share of open interest on 24 commodities. Net long = non-commercial long + non-reportable long – non-commercial short – non-reportable short. Combined futures and options.

Source: Bloomberg, World Gold Council

John Reade is the chief market strategist at the World Gold Council. The original is here.

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