Gold Rises in August Amid Rate Cut Speculation and Election Concerns

The World Gold Council published its monthly Gold Market Commentary for August this week and reported that August was a banner month for gold, with the metal reaching $2,513 per ounce, marking a 3.6% rise for the month (see Figure 1). A drop in the U.S. dollar and Treasury yields, combined with increasing chatter about potential Federal Reserve rate cuts, helped push gold to a new all-time high on August 20.

However, it gave back some of those gains toward the end of the month. The rally continues to capture attention, especially as investors scramble to make sense of the macroeconomic factors and looming U.S. election risks even with the surging popularity of VP Kamala Harris.

Drivers Behind Gold’s Rally

The gold price increase is attributed mainly to a weaker U.S. dollar and declining 10-year Treasury yields. As the U.S. Fed hinted at the possibility of rate cuts, the resulting drop in yields made gold more attractive to investors looking for a safe-haven asset. But, as always with financial markets, the story’s never quite that simple.

While economic data points to some softening, strong retail sales, and positive consumer sentiment have given mixed signals. In the last quarter, U.S. retailer performance was either good, bad, or ugly depending on the retailer and not uniformly across the board.

According to the report, another factor helping gold in August was the significant reduction in gold import duties in India. The move spurred demand from both consumers and jewelry retailers in the country, further pushing up global demand for the metal.

In addition, according to the World Gold Council ETF report, physically-backed gold ETFs saw steady inflows for the fourth straight month, with Western funds contributing the most.

FIGURE 1: Gold’s Gained in Almost All Major Currencies in August

Options Market Reflects Growing Uncertainty

The report also highlighted the gold options activity, an often overlooked part of the market, and it showed a notable uptick. Investors appear to be hedging their bets on a volatile second half of 2024. Options spreading positions, which were once relatively benign, have hit multi-year highs. This rise points to investors bracing for a potential rate-cutting cycle by the Fed and a contentious U.S. election in November.

Gold options sentiment is decidedly bullish, and options “spreading” has surged as traders position themselves for both rate cuts and possible election turmoil. It’s a bit of a gamble, but one that more investors seem willing to take, with gold’s perceived value as a hedge against uncertainty still shining brightly.

Mixed Economic Signals

Globally, things are a bit murky. While GDP growth holds steady at 2.5%, manufacturing, particularly in Europe and China, remains sluggish. Services, on the other hand, are keeping the overall numbers afloat. In the U.S., unemployment has crept up to 4.3%, and loan delinquencies are on the rise. These signs point to a potential recession, though the stock market remains resilient and continues to climb.

Fed Chair Jerome Powell’s speech at Jackson Hole did little to change market expectations, with short-term rate markets already pricing in a 100-basis-point cut by year-end. Whether this materializes remains to be seen, but the Fed’s balancing act between avoiding a recession and keeping inflation in check will be crucial. And let’s be honest, no one envies them right now. Investors are left navigating a choppy market where clear signals are hard to come by.

Looking Ahead: What’s Next for Gold?

So, where does gold go from here? According to the report, the U.S. Fed’s next moves and the outcome of the U.S. election looming large, investors remain on edge. It seems that rate cuts and political uncertainty are keeping gold firmly in the spotlight, as traders continue to hedge against potential market turbulence.

If history is any indication, gold thrives in times of uncertainty. And with the market facing both policy shifts and geopolitical risks, the metal’s appeal as a safe-haven asset is unlikely to fade anytime soon. China’s slowing economy may put a damper on demand, but Western investors, particularly through ETFs, are expected to keep fueling gold’s rise.

In short, it’s going to be a volatile few months. Investors might want to buckle up because gold, for now, is flying high. But the question remains: How long can it stay there?