Commodities & Metals

Gold Prices Kept Floundering in September, Outlook Remains Cloudy

At the beginning of September, the price of gold had dipped by 4% for the first eight months of 2021. At the end of the month, the price of gold was down 8% for the year to date.

What’s odd about that is that September typically delivers positive returns to gold investors, according to the World Gold Council (WGC). In its report on the gold market published in September, the confidence level for that statement was 90%. Strong demand from India and higher investment activity after lower-activity summer months were cited as the main reasons for the September uptick.

The WGC noted three events that provoked sharp upward price movements last month: good U.S. employment data, slowing consumer price index growth for August and the potential collapse of China’s Evergrande. All sent gold prices higher, but the increases could not be sustained.

Rising yields on U.S. Treasuries were “a major driver in gold’s weakness,” according to the WGC. Outflows from gold exchange-traded funds and a stronger dollar also helped raise the opportunity cost of gold.

The short-term outlook for gold does not brighten much. If, as some believe possible, the Federal Reserve begins tapering asset purchases next month, interest rates will rise and that will “certainly be a headwind for gold.” That headwind will be offset partially if inflation runs hot in the United States and Europe, because gold is historically a safe haven against rising inflation.

ETF outflows totaled 15.2 metric tons ($830 million) in September. U.S. outflows totaled $348.6 million, and European funds dumped $640 million worth of the yellow metal. Asian ETFs raised their investments in gold by $134.6 million last month. At the end of September, global ETF holdings of gold totaled 3,592 metric tons, valued at $202 billion. According to the WGC, that’s the lowest total since April.

If the global economic recovery stalls and inflation remains high (aka, stagflation), the WGC sees a brighter side: “Gold has seen good returns in these periods, boosted by an elevated risk environment, equity market weakness, low real interest rates, and a weaker US dollar.”

Gold investors also can take some comfort from the WGC’s analysis that real U.S. interest rates would have to rise to a real rate above 2.5% in order for Treasury yields to affect longer-term returns on gold investments. That’s a long way from the rate of 0.00% to 0.25%.