Gold remains under pressure from the stronger dollar and EM weakness, something that was highlighted when the collapse in the Turkish lira triggered across the board gains for the dollar while sending gold through support at $1,205/oz. The market is currently transfixed by the negative impact on those EM economies maintaining large external debt in dollars at a time where both the dollar and funding costs are rising.
Instead of providing support to gold, these geopolitical problems have instead helped send the metal even lower. Longer-term investors trading exchange-traded funds backed by gold have cut around 115 tons from their total holdings and given the current price level below $1,200/oz, an additional 200 tons could be underwater compared to purchase levels (source: StanChart via Bloomberg).
The combination of US stocks and core bond markets seeing demand has reduced the need for alternative investments such as gold. On that basis it would require a change in the direction of the dollar, not least against the Chinese yuan with whom gold has seen a very high correlation during the past few months. Other drivers could be a major sell-off across key stock markets or potentially a change in the outlook for the US economy and the need for continued interest rate hikes.
On August 24, Federal Reserve chair Jerome Powell will speak at the Fed’s annual Jackson Hole conference. The narrative is arguably that global markets will remain in a fragile state until the Fed backs off its quantitative tightening and rate hiking regime, with the risk of a real crisis linked to EMs' overindulgence in borrowing USD since the global financial crisis.
Should Powell unexpectedly blink and signal a slowdown in the tightening process, the dollar could get sold and potentially send gold on a path to recovery.
In such a scenario the recovery would likely gather pace on the back of the fact that hedge funds have been continued sellers for a while now. In the week to August 7, gold’s net-short reached a new record of 63,000 lots as funds continued to add length to the gross-short while cutting gross-longs.