Key Points

Citing the Gold Return Attribution Model (GRAM), the report suggests major contributors to August price performance were a drop in the US dollar early in the month, continued geopolitical tensions, and strong global gold ETF (Exchange-Traded Fund) flows. More recently, a higher chance of a September rate cut has also played a role.

Gold ETF flows provided plenty of support, especially late in the month, posting USD 5.5 billion of inflows, dominated by North America with USD 4.1 billion, and Europe with USD 1.9 billion, while Asia and other regions saw outflows.

As per the report, US real rates may become more influential for gold in the near term as US investors grab the baton from emerging markets, and that influence could increase if rates were to fall.

"So far, rates have been sticky, but that is more reflective of a growing unease about stagflation. Our quantitative analysis of various US investor types suggests that stagflation is of greatest concern to ETF investors, followed by retail bar and coin buyers. Fast money futures investors are more concerned with rate trajectory," the report noted.

The relationship between the price of gold and its core drivers shifts over time, sometimes reflecting who is most active in the market. Last month, the World Gold Council suggested that one reason for gold's decoupling from rates post 2022 was the preponderance of emerging market demand from central banks and other investors, rather than a breakdown in the US investor relationship with rates.

"Now that central banks and Asian investors have stepped back a bit, as indicated by our Gold Demand Trends data, local premia and intraday session returns, a tighter gold-rates relationship could re-establish itself and Western investors (particularly the US) could become more dominant in driving short-term returns," the report stated.

Should rates across the curve start to drop, a ramp-up in gold buying could be triggered in the US. However, the report suggests that the curve is steepening as the short end drops due to hopes of a Fed cut, but the long end remains high on risk premia and concerns about future inflation.

However, a rise in inflation that is concurrent with a slowdown in economic activity and weakening labour markets, "Signals we are increasingly flirting with a stagflationary environment, and this tends to favour gold."

- ANI