In its latest report, the World Gold Council (WGC) has highlighted a significant boost in gold prices, with the metal posting a 3.6% rise in August, closing the month at $2,513 per ounce. On August 20, gold reached a new all-time high before a marginal decline in the final days of the month. This performance was primarily driven by a weakened US dollar and lower 10-year Treasury yields, influenced by the Federal Reserve’s indications of potential interest rate cuts.
According to the WGC’s Gold Return Attribution Model (GRAM), these economic factors played a pivotal role in driving gold prices higher. However, momentum from previous months slightly tempered the returns. The report also underscored the positive impact of India’s recent cut in gold import duties, implemented in late July, which has spurred strong demand from both consumers and jewellery retailers.
In India, jewellery retailers quickly responded to the duty reduction with increased purchasing, reflecting the critical role gold plays in the country’s jewellery market. Anecdotal evidence from the market suggests that this demand surge has provided a much-needed boost to Indian jewellers, who are preparing for the upcoming festive season.
Global physically-backed gold ETFs also saw continued inflows for the fourth consecutive month, with Western funds leading the charge. This highlights a growing international appetite for gold, particularly as a safe-haven asset amid the current uncertain macroeconomic environment.
The World Gold Council report also pointed to the looming US election and expectations of further interest rate cuts from the Federal Reserve as significant drivers of market sentiment. Investors are increasingly turning to gold as a hedge against these uncertainties, particularly through options markets, which have seen elevated activity in recent months.
The World Gold Council report says ”A soft landing still looks the most likely outcome, particularly as Fed Chair Jerome Powell set the stage for a series of interest rate cuts in his annual address at Jackson Hole. Short-term rate markets, for their part, were little changed after Powell’s remarks, having priced in nearly 100 basis points in cuts before the end of the year, suggesting they anticipate further weakening in the labour market. What is clear, as stated by Powell, is that the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks. In other words, the Fed will have to navigate between pre-emptively avoiding a recession and the risk of inflation picking up again. The latter would arguably be far more damaging. In this uncertain environment it is no surprise that investors have taken to the options market to hedge against, or speculate on, these seemingly binary outcomes, particularly given the tensions surrounding the US election in November. For instance, we continue to see elevated flows into equity options, which have now surpassed the previous all-time high back in Q4 2023. This shift in investor behaviour is evident in the gold options market too. A normally benign and often overlooked corner of gold data is stirring.”]
According to report ”Today, we face both. Markets expect the Fed to embark on a surprisingly aggressive rate-cutting path in September and we have a systemically critical US election in early November. While the OSP data doesn’t reveal the nature of the spread positions, the difference in implied volatility (IV) at different maturities provides clues (Chart 3). This shows that short-term IV remains unusually high relative to longer-term IV plausibly reflecting the gravity of monetary policy and election developments of late.”
“We can only speculate on how broader macro data might influence market reactions, but it seems likely that both election dynamics and expectations of rate cuts have increased activity in gold, as seen in options ‘spreading’ positioning,” said the World Gold Council. “Under these circumstances, it is reasonable that investors are more focused on the near-term outlook. Their behaviour suggests that they view gold as a hedge against immediate event risks while also positioning it as a beneficiary of lower interest rates. Outside of the US, the continuing slowdown in China is likely to impact consumers’ capacity and willingness to buy gold – certainly when it comes to jewellery. But even China’s gold ETFs saw outflows last month in contrast to the pickup in Indian ETF demand and the welcome return of Western ETF inflows.”
The US economic landscape remains mixed, with unemployment rising to 4.3% in July and concerns about a potential recession growing. At the same time, consumer sentiment and retail sales have been more positive, complicating the outlook. The WGC expects gold to remain a key investment asset for those seeking to hedge against economic and political risks in the months ahead.
With China’s economy slowing, which could affect consumer demand for gold jewellery, the surge in Indian demand following the import duty cut and continued inflows into global gold ETFs paint a positive picture for the gold market. Jewellers and investors alike are eyeing gold as a stable and profitable asset in this evolving economic landscape.
For the Indian jewellery sector, the combination of a rising gold price and increased demand provides optimism as the festive season approaches, further reinforcing gold’s central role in both investment and ornamentation.
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