The gold market is currently navigating a turbulent period influenced by various economic variables, but while short-term fluctuations are anticipated, a dramatic long-term downturn is not expected.
September performance
Gold prices faced a challenging September, declining by 3.7%, according to a report by the World Gold Council. The decline was largely attributed to rising bond yields and a robust US dollar, among other economic factors.
Gold oscillated between US$1,900 and US$1,950 for most of the month before a significant dip on September 27 led to a closing price of US$1,871.
The Council's gold model, GRAM, points to higher opportunity costs as a main driver of the price dip, with the US 10-year yield gaining almost 50 basis points.
A strong US dollar contributed to more modest month-on-month drops in other currencies like the Euro, Japanese Yen, and Pound Sterling.
Additionally, late-month price declines were also likely triggered by an overreaction to US economic data and a drop in the Chinese domestic gold price premium.
Global gold exchange-traded funds (ETFs) saw an outflow of US$3 billion, balanced between North American and European funds. The net outflows from gold ETFs have extended their losing streak to four months.
The declining trend in gold ETFs pushed the third-quarter losses to US$8 billion, with North America accounting for the vast majority.
North American funds have registered outflows for four consecutive months, losing US$2 billion in September. European gold ETFs also witnessed heavy outflows while Asia saw a gain.
A higher opportunity cost, driven by increasing Treasury yields and a strong dollar, may have deterred investors.
Gold ETF (NYSE:GLD) holdings at the end of September remain at their lowest since March 2020. The year-to-date global outflows stand at US$11 billion, with European funds leading the downward trend.
Shortlived woes
While bond yields are expected to continue rising, the Council doesn’t expect a substantial downtrend in gold prices.
Support is likely to come from volatile equities, the rising recession risk, inflation instability and continued interest from central banks. Additionally, a potential buying opportunity may arise for investors if the market becomes excessively short.