Against the a backdrop of an easy monetary policy adopted by central banks globally, continued geopolitical uncertainty with the looming Brexit deadline and tensions in West Asia, as well as rising turmoil in the US Congress, global demand for gold remained strong through the month of September, according to data from the World Gold Council (WGC).
There are several potential positive catalysts for gold in October. The US House of Representatives has initiated a preliminary inquiry into whether to proceed with a formal impeachment investigation of US President Donald Trump, a move that could negatively impact risky assets and drive China to potentially delay trade solutions until the 2020 Presidential election. In addition, the deadline for a Brexit decision falls at the end of October, and there is still uncertainty as to whether there will be a ‘No Deal Brexit’ or a deadline extension.
Potential headwinds
However, on the flip side, continued dollar strength and muted demand for gold in India and China could create headwinds, the report said.
Despite the price rise in September, interest rates worldwide remain low; the WGC estimates that over 80 per cent of sovereign debt is trading with negative real rates, lowering the cost of investing in gold.
During the month, global monetary policy continued to influence gold prices as many central banks around the world cut rates or expanded quantitative easing measures. The Federal Reserve cut rates by 25 bps in September – a move that was widely expected, but signalled at most only one further cut this year.
The US stock market is trading near all-time highs and, historically, October is a month when some of the sharpest historical down-moves in stock performance are seen; the most recent of which was last year when the S&P 500 fell 7 per cent during the month.
Gold-backed ETFs
Global gold-backed Exchange Traded Funds (ETFs) reached their highest levels in September, adding 75.2 tonnes to a total of 2,808 tonnes during the month, according to WGC. The global demand for gold-backed ETFs continued even as global rates increased. The dollar strengthened, with gold prices remaining at all-time high in every major G10 currency, except the US dollar and Swiss franc.
North American funds led September’s flows, adding 62 tonnes ($3.1 billion), European-listed funds brought in 7.7 tonnes ($586 million), with the UK-based fund holdings continuing to see all-time highs, reaching 21 per cent of global gold-backed ETF assets in September as investors position for an October 31 Brexit deadline.
Asian funds added 3.9 tonnes ($187 million). Low-cost gold-backed ETFs in the US have seen positive flows for 15 of the past 16 months, and have increased their collective holdings by 51 per cent so far this year, the report said.