We share our latest observations on global asset markets regarding T8 Gold

The gold price experienced its largest monthly retreat since February, falling 4.7% to end September at US$1,849 per ounce, below its 50, 100 and 200-day moving averages. The negative sentiment toward precious metals saw a continuation of the selling experienced in August. Silver (with industrial and precious metal characteristics), fell 9.3% in September and maintained its considerable underperformance relative to gold on a year-to-date basis (gold +1.4% versus silver -7.6%).

In futures markets, investors continued to reduce their gold exposure in September, with long positions dropping to the bottom decile on a year-to-date basis (bearish sentiment) while the largest gold ETF (GLD) received its fourth consecutive month of outflows. Selling pressure on gold impacted gold equities.

We attribute the challenging month for gold to the rapid upward move in bond yields combined with a strengthening US dollar.

The US Federal Reserve has taken a very hawkish stance since July with the aim of slowing the US economy and reducing inflationary pressures. In September, bond markets continued the yield curve steepening from the previous two months, with yields on short-dated US Treasury bonds (1- to 3-year maturities) rising less than 10-year US Treasury yields (+46bps) and the long end of the curve (+20-year maturities) which spiked by 51bps (a 2 standard deviation move in yields).

The US dollar (+2.5% on a trade-weighted basis) experienced its second consecutive month of positive returns.

Outlook

In addition to gold receiving safe haven support from the various geopolitical flashpoints globally, we see low-risk appetite in equity markets, rising recession risk, elevated inflation and central bank gold buying as supportive factors in the short term.

Further, despite interest rates in the United States being at their highest level since mid-2007, the rate cycle is nearing its peak (it is certainly closer to the end than the beginning). The cycle will see rates peak, then pause before ultimately being cut in line with macroeconomic conditions. Lower interest rate expectations under this outlook (which would likely result in lower real and nominal US Treasury yields and place downward pressure on the US dollar) would be a fundamental tailwind for the gold price.

Persistent inflation (or an inflation shock driven by rising energy prices) following interest rates reaching a peak (which is a credible scenario) would be an extraordinary upward catalyst for gold.

There appears to be extraordinary complacency in the market’s outlook for inflation (consensus assumes that core PCE returns to 2% in the short to medium term from the present reading of 4.3%). The US Federal Reserve Bank of New York survey (a key barometer of expectations) has inflation falling to 2.8% over a three-year horizon (modestly below its 5-year average prior to the COVID-19 pandemic).