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(Kitco News) - The gold market continues to hold its own as bond yields and the U.S. dollar remain elevated; however, the market continues to struggle, seeing further liquidations in gold-backed exchange-traded products.
In its latest market report published Tuesday, the analysts at the World Gold Council said that the global ETF market saw its holding drop by 34 tonnes, valued at $2.3 billion. This is the fourth straight month of liquidation in the gold market.
"Overall, global gold y-t-d flows were -US$4.9bn at end of July, a cumulative reduction of 84t in holdings," the analysts said in the report.
However, due to resilient prices, assets under management actually increased by 2% to $215 billion.
Looking at a regional breakdown in outflows, European listed funds were slightly weaker compared to North American markets. The report said that 18.5 tonnes of gold valued at $1.31 million flowed out of Europe; meanwhile, North American listed products saw their holding decline by 16.3 tonnes or nearly $986 million.
The analysts said that central bank monetary policies from the Federal Reserve and European Central Banks continue to dominate investment demand in the gold market. However, they noted that the Federal Reserve is expected to be nearing the end of its tightening cycle, providing some support for gold.
"The US Fed increased rates by 25bps in July, but with recent inflation data softening, investors expect the Fed's current tightening cycle to end soon. While such expectations supported the gold price, they also led to investor risk-on sentiment and a rally in equities, which may have diverted investment away from gold," the analysts said. "To tame the region's stubborn inflation pressure, the European Central Bank and the Bank of England lifted their policy rates to multi-decade highs. Combined with investor expectations of further rate hikes ahead, interest in gold ETFs remained tepid in the region. On a positive note, FX-hedged products in Europe continued to see inflows amid changes in local currencies.
Bucking the overall trend, Asian-based funds saw regional inflows of 2 tonnes, valued at $132 million.
Despite the disappointing investor interest, the WGC said that gold prices managed to end the month with a 3.1% gain, noting a rise in breakeven rates, indicating that inflation remains a concern.
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"This move suggests a conundrum. Growth data has been stronger and inflation data has been weaker, yet the rise in breakevens was the result of stronger nominal yields – not real yields – suggesting the bond market sees 'good' data merely as inflationary rather than growth-inducing. This appears to be indicative of the rift between the equity market narrative of a soft landing and the bond market narrative (drawn from a record inverted yield curve) of an eventual hard landing," the analysts said.
The analysts added that ongoing market uncertainty should continue to support gold prices, even if the price action remains muddled through August. Historically, August has been one of the stronger months for gold; however, WGC analysts said that this year could prove to be different.
"August may not be as gold-friendly as it has been in the past, but there are good reasons as to why support for gold will establish itself later in the year," they said. "As discussed in our Mid-Year Outlook, upside looks more probable than downside for gold in the current environment. For example, while stocks have weathered plenty of headwinds so far with some emerging fundamental support, sentiment and valuation still appear elevated. Economic risks also remain firmly on the table, despite a sentiment shift over the last few weeks."
