Gold Surges in August Amid US Dollar Drop and Rate Cut Signals

Gold prices soared by 3.6% in August 2024, reaching USD 887.98 per 10 grams. The surge was driven by a weakening US dollar, reduced Treasury yields, and increased demand in India. Investor interest in gold and equity options also spiked with looming economic uncertainties and potential Federal Reserve rate cuts.

In August 2024, the price of gold continued its impressive run from July, closing the month with a notable 3.6 percent gain at USD 887.98 per 10 grams, according to the World Gold Council (WGC). The precious metal reached a new all-time high on August 20 before experiencing a slight decline as the month drew to a close.

The Gold Return Attribution Model (GRAM) indicated that the primary driver of gold's ascent was a substantial drop in the US dollar. This, together with a decline in 10-year Treasury yields as the Federal Reserve signaled potential rate cuts, propelled gold prices. However, the rise was somewhat tempered by a momentum factor, as historically, strong performance in one month often leads to weaker returns in the next.

A significant development in August was the reduction of import duties on gold in India, which became effective from late July. This policy change has spurred a surge in gold demand across the country, with reports indicating strong buying interest from both jewelry retailers and consumers. Additionally, global physically-backed gold ETFs have seen their inflow streak extend to four months, with Western funds contributing the majority of the flows.

The current macroeconomic environment is characterized by contradictory economic data and the approaching US presidential election, adding an extra layer of uncertainty. This has prompted increased investor activity in options markets, with gold options spreading positions surging to multi-year highs. Such trends reflect a market preoccupied with potential rate cuts and election outcomes. Globally, economic indicators present a mixed picture, with steady GDP growth at 2.5 percent and composite PMIs in positive territory.

The Federal Reserve's recent comments at Jackson Hole, indicating potential interest rate cuts, have left short-term rate markets largely unchanged. Markets have priced in nearly 100 basis points of cuts by year-end, anticipating further weakening in the labor market. Fed Chair Jerome Powell emphasized that the timing and pace of rate cuts will be data-dependent, balancing the risks of preemptively avoiding a recession and managing inflation.

Investor behavior has notably shifted towards options markets, with elevated flows into equity options surpassing previous highs. This trend is mirrored in the gold options market, where options spreading positions have risen significantly. Historical data suggests that such spikes often correlate with either interest rate policy shifts or major market events.

(With inputs from agencies.)