(Kitco News) - Despite renewed threats of an imminent rate hike in September, gold’s price action during August shows just how much potential the precious metal has as a hedge against the unsustainable rise in global sovereign debt.
Wednesday, the World Gold Council reported that investment demand in gold-backed exchange-traded funds saw its second-largest capital inflow on record. According to its monthly ETF data, the WGC said that $18 billion flowed into global gold ETFs – led by North American- and European-listed funds – in August.
“Y-t-d, global gold ETF inflows totalled US$29bn, equivalent to a 160t increase in holdings. Asian-listed funds remained the largest contributor to global inflows over the period, followed by Europe,” the analysts said in the report. “Rising long-term yields and the US Treasury's 19 August intervention heightened concerns around fiscal sustainability and dominance, while reviving fears of potential dollar debasement. As gold rallied and broke above key technical levels, price momentum likely attracted additional tactical and institutional demand.”
North American funds attracted $7.7 billion in capital last month, their third-largest monthly inflow on record.
“August's strong inflow helped offset the region's record US$13bn outflow in March, bringing North American fund flows back into positive y-t-d territory,” the analysts said.
Across the Atlantic, European-listed funds saw capital inflows of $7.9 billion, the largest on record.
“Gold's role as a portfolio diversifier and an alternative to sovereign debt likely remained an important driver of demand. The continuation of strong buying following July's rebound also suggests that investors increasingly viewed the summer correction as an opportunity to rebuild strategic positions rather than reduce exposure,” the analysts said.
Finally, Asian demand, which has been a driving force in the gold market, saw regional ETFs attract $2 billion in capital.
“China again dominated regional inflows as stabilising and rebounding local gold prices attracted investor interest and kept the market on pace to surpass FY25's record year of inflows. Continued declines in local government bond yields and a range-bound equity market likely provided additional support,” the analysts said.
In a separate report, the WGC said that going forward, investment demand will depend on whether the market has confidence that the U.S. Treasury will be able to cap bond yields. The 10-year yield continues to trade at its highest level in three years, at 4.83%.
“What form intervention takes, or even who conducts it, is perhaps less relevant than how the market views it. Although the US Treasury has considerable fire power, the Fed’s is unlimited…should they decide to get involved. Nominal yields would almost certainly be capped. But where would the pressure go instead? If the market takes it in its stride, then perhaps nowhere. If it interprets intervention as desperate, the release valve would likely be falling real yields, an expanding term premium and a lower US dollar – or a crowding out of private sector demand for these assets,” the analysts said. “In the end it boils down to whether the market is convinced. If it isn't, gold probably benefits. If it is, then one of the narrative supports for gold’s strong multi-year run is temporarily lost. In our view, spending and tax commitments make that a challenging proposition.”
