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Gold could further rebound in the near future!

Recently, World Gold Council published Gold Market Commentary in the August 2022 & said, “Dollar strength and negative sentiment weighed on gold in July!” In addition, our historical analysis of futures positioning in gold, the US dollar and 10-year Treasury bond suggests gold could further rebound in the near future.

Nuance played a big part in the late-July Federal Open Market Committee (FOMC) meeting statement. An unusually large rate hike (+75bps) and consistently firm language on inflation was largely dismissed by markets. Instead, noting future data dependence vs forward guidance and the slim potential for a slower pace of hikes towards the end of the year, the US dollar promptly sold off and equity markets saw some of the strongest one-day rallies since 2020.

The most recent Bank of America (BofA) fund manager survey, released more than a week prior to the Fed meeting, painted sentiment as ‘dire’ and the proportion of managers willing to take on more risk reached an all-time low. Also notable in the report was that cash as a share of total portfolio holdings was at its highest since 2001. Although causality isn’t clear, this may explain the dollar’s recent strength.

It may also present an opportunity. After all, sentiment tends to mean revert. Extended positioning in the futures market coupled with a deployment of these cash allocations could give a boost to risk-asset inflows in conjunction with a weaker dollar.

But it could also backfire for markets and test the resolve of the Fed, whose belief is that bringing demand back into balance with supply is necessary to combat inflation. All in all, a weaker dollar would be welcome for gold investors, but a reflationary environment could be a headwind, especially if it led to the Fed reasserting itself.

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