Gold prices eased slightly on Tuesday but remained near their highest levels in over three months, with spot gold at $4,647.05 per ounce and US gold futures at $4,694.50. The yellow metal has gained over 15% this month, making it the strongest monthly gain since September 1999, according to UOB. This rally is primarily driven by a weaker US dollar, which has fallen 0.8% this month, making gold more attractive to foreign currency holders, and the US Treasury's bond buyback plans, which have kept Treasury yields down by 3 basis points this month.
The US Treasury's decision to double the size of liquidity support buyback operations for longer-dated notes and bonds has fueled "debasement trade" fears, where investors seek scarce assets amidst concerns about government debt and currency weakness. This move, along with the Federal Reserve's unclear stance on fighting higher inflation, is expected to keep gold well-supported in the coming weeks, with analysts like Tony Sycamore of IG projecting upside resistance at $4,900-$5,000. However, some analysts caution that it's too early for gold to reach higher targets, such as TD Securities' $5,350/oz, given the risk of rising short-term rates if crude oil prices continue to climb.
Investor attention is now squarely focused on upcoming US economic data and Federal Reserve communications. The US Personal Consumption Expenditures (PCE) report, the Fed's preferred inflation gauge, is due on Wednesday. Analysts like Pooja Sriram of Barclays anticipate core PCE to rise 0.2% from June, potentially reducing the risk of a near-term rate hike if the reading is soft. Additionally, Fed Chair Kevin Warsh's debut speech at the Jackson Hole Symposium later this week is highly anticipated, as markets seek guidance on the outlook for interest rates and his independence from the Trump administration. A dovish surprise from Warsh could be highly bullish for gold, while a hawkish stance could halt the current rally.
While gold is traditionally viewed as an inflation hedge, elevated interest rates can diminish its appeal as it is a non-yielding asset. The dollar index has remained subdued, supporting gold's rally. Last week, gold-backed exchange-traded funds (ETFs) saw their largest weekly demand in 10 months, attracting inflows equivalent to 46.7 metric tonnes of gold, worth $6.4 billion, primarily from North American and Europe-listed funds. The metal also broke above its 200-day moving average, further strengthening its upward momentum. Geopolitical tensions, such as those in the Middle East affecting oil prices, could also influence inflation expectations and the Fed's monetary policy decisions.
