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Rising bond yields drive outflows from gold ETFs, but long-term support remains

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(Kitco News) - Rising bond yields continue to take their toll on the precious metals markets as investors flee from gold-backed exchange-traded funds (ETFs), according to the latest data from the World Gold Council.

Wednesday, the WGC said that global physically-backed gold ETFs saw their third consecutive month of outflows, declining by 46 tonnes, valued at $209 billion. So far this year, global ETFs have seen net outflows of 130 tonnes.

"During the month, the gold price declined by 1%, the weakest performance since February.  And its weakness, especially during the first three weeks, was likely the main driver of the outflows in August," the analysts said in the report.

While Europe has been the biggest source of outflows in the gold market, last month was led by North American-listed funds. The WGC said that 44 tonnes of gold, valued at $2.7 billion, flows out of North American markets.

"As the US economy continues to defy recession expectations, with resilience in household consumption, the 10-year Treasury yield rose further. Fed Chair Powell's remarks at Jackson Hole further firmed investors' belief that rates are going to stay higher for longer, reducing gold's allure as the opportunity cost climbs," the analysts said in the report. "In addition, asset managers' net long positioning in 10-year Treasury futures rose to their multi-decade highs on bets of rates peaking and the most attractive yield in 16 years, diverting some attention away from gold."

Across the Atlantic, European funds saw their third month of declines in gold ETFs; however, analysts noted that the pace of outflows in August was slightly slower than in July. In total, 8 tonnes of gold, valued at $315 million, fled European funds.

"It is worth noting that 35% of the tonnage loss came from FX-hedged products as the local currency fluctuated. The rest can be largely attributed to rising interest rate expectations as the region's inflation remained stubbornly high – the Bank of England delivered the 14th consecutive rate hike in August while European Central Bank President Lagarde recently reiterated the necessity of higher rates for longer," the analysts said.

The analysts said they suspect weaker economic activity in Europe, compared to the U.S., created some regional safe-haven demand for the precious metal.

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While Western investors continue to shun gold, the WGC said the East is embracing the paper market. According to the report, Asian-based funds saw inflows of 7 tonnes. This is the sixth straight month of inflows for this market segment.

Finally, the WGC said that "other" markets reported inflows of 0.2 tonnes, even as the trend remains negative for the year.

"So far in 2023, demand for funds in Other region has remained negative at 3t (-US$140mn), South Africa and Australia accounted for the majority of the loss," the analysts said.

Although gold continues to face a challenging environment as bond yields and the U.S. dollar remain elevated, many analysts have noted that the precious metal continues to attract long-term support as recession fears continue to linger.

Some analysts have noted that gold has been fairly resilient as the 10-year bond yields hold steady above 4%, near its highest level in more than 15 years. At the same time, the U.S. dollar index is holding at a multi-month high above 104.

In a recent interview with Kitco News, Chantelle Schieven, head of research at Capitalight Research, said that given where bond yields and the U.S. dollar are, gold prices should be $100 or even $200 lower.

She added that gold investment will pick up when investors realize that a slowing economy will mean the Federal Reserve will be unable to bring inflation down to its 2% target.

Christopher Vecchio, head of futures and forex at, said he is also encouraged with gold's relative strength and noted that it appears the precious metal is building a solid base around $1,900 an ounce.

While gold might not be ready to rally to new all-time highs in the near-term, he said that base building is something investors should pay attention to. 

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