Despite a challenging macroeconomic outlook, gold refuses to become the safe-heaven asset it was in previous market downturns. The strength of the US dollar had a lot to do with gold trading below $1,700 an ounce on October 10, as did the decline in US employment data, which is signaling to markets another Federal Reserve (Fed) rate hike.
After the unemployment rate fell to a historic low of 3.5%, the US dollar and Treasury yields continued their gains, putting pressure on gold, with US inflation data set to come out on October 13 possibly being another catalyst downward for gold prices.
Meanwhile, Bloomberg’s top forecaster, Christophe Barraud, showed on Twitter on October 10 that the amount of gold held in exchange-traded funds (ETFs) continued declining for 17 weeks in a row, making it the most extended period of outflows since 2018.
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Outflows due to gold pressure
While gold-backed ETFs and similar products account for a sizable part of the gold market, where institutional investors use them to implement their investment strategy, outflows across them indicate long-term trends and a desire by market participants to hold gold.
Global gold-backed ETFs saw outflows in amounts of $5 billion, the equivalent of 95 tons of gold, in September, making the largest outflow since March 2021. Despite these outflows, the price resistance was formidable, where gold hit a monthly intra-day low of $1,615 but recovered to $1,677 at the time of writing.
Blame the US dollar
The surge of up to 15% in the US dollar in 2022, measured by the US dollar index (DXY), puts pressure on all assets and central banks. As gold is usually quoted in US dollars, the higher the dollar is, the lower the price of gold since safe heaven seekers turned to the dollar to seek shelter in volatile markets in 2022.
While aggressiveness by the Fed could influence gold prices in the short term, the probability of the US dollar being the primary driver of gold prices remains high. Investors looking to get exposure to gold should primarily track the performance of the dollar to decide when is an opportune time to get in.
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