Gold Prices Soar in August 2024
US Dollar Drop and Indian Demand Boost
In August 2024, gold continued its impressive run from July, closing the month with a notable 3.6% 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.
According to the Gold Return Attribution Model (GRAM), the primary driver of gold’s ascent was a substantial drop in the US dollar. This was coupled with a decrease in 10-year Treasury yields, as the Federal Reserve signaled potential rate cuts. However, gold’s rise was somewhat tempered by a momentum factor, as historically, a strong performance in the previous month often leads to a weaker return in the subsequent month.
A development in August was the reduction of import duties on gold in India, effective from late July. This policy change has spurred a surge in gold demand across the country. Reports indicate a strong uptick in buying interest from both jewelry retailers and consumers. Additionally, global physically-backed gold ETFs saw their inflow streak extend to four months, with Western funds contributing the majority of the flows.
The current macroeconomic environment is characterized by a mix of contradictory economic data. The approaching US presidential election adds an additional layer of uncertainty, prompting increased investor activity in options markets. Gold options spreading positions have surged to multi-year highs, reflecting a market preoccupied with both a potential rate-cutting cycle and election outcomes.
Globally, economic indicators present a mixed picture. GDP growth remains steady at 2.5%, with composite PMIs in positive territory. The Federal Reserve’s recent signals at Jackson Hole, indicating possible 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 labor market weakening. Fed Chair Jerome Powell emphasized that the timing and pace of rate cuts will be data-dependent, navigating between preemptively avoiding a recession and managing inflation risks.
Investor behavior has 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.
Doubts Revealed
Gold Prices -: Gold prices refer to how much it costs to buy gold. It’s like when you buy a toy, the price tells you how much money you need to pay.
US Dollar -: The US Dollar is the money used in the United States, like how we use the Indian Rupee in India.
Treasury Yields -: Treasury yields are the interest rates the government pays to people who lend it money. It’s like when you lend your friend a pencil, and they give you an extra eraser as a thank you.
Import Duties -: Import duties are extra charges added to goods brought into a country. It’s like paying a fee to bring a toy from another city.
ETFs -: ETFs, or Exchange-Traded Funds, are like baskets of different investments that people can buy and sell, similar to how you can trade different types of cards.
Federal Reserve -: The Federal Reserve is the central bank of the United States. It helps control the country’s money and interest rates, like how your school principal manages the school rules.
Rate Cuts -: Rate cuts mean lowering the interest rates, which makes borrowing money cheaper. It’s like getting a discount on your favorite candy.
US Presidential Election -: The US presidential election is when people in the United States vote to choose their leader, similar to how we vote for class monitors in school.
Gold Options Trading -: Gold options trading is a way people buy and sell the right to own gold in the future. It’s like promising to trade your toy with a friend next week.