Gold is waiting for a weak dollar to restore its luster

Gold exchange-traded funds lost $4.5 billion in July
Gold is waiting for a weak dollar to restore its luster
Will the price reaches $2,500 per ounce at the end of 2022?

The dollar’s strength and negative sentiment affected gold last July. Gold exchange-traded funds lost $4.5 billion, and speculative positions in gold futures contracts turned short for only the fifth time since 2006.

This is what was stated in the report of the World Gold Council for last month as issued on Thursday, which coincided with prices recording a rise yesterday, supported by the decline in US Treasury bond yields. Gold and silver prices rose strongly due to safe-haven demand, as tensions between China, Taiwan, and the United States increased this week.

Another factor could be added that could weaken the dollar, and contribute to a more sustainable rise in gold and other metals. On this point, investors say the outlook for less aggressive monetary policy, with higher allocations to cash and growing fears of a deepening recession, could weaken the dollar and lead to a more sustainable rally in gold, stocks, and other commodities.

We must also point to the decision of the European Union issued on July 21 to impose a ban on Russian gold exports (a decision that Switzerland decided to adopt yesterday), in the context of tightening the economic noose on Russia. The Group of Seven major industrialized countries announced in June their commitment to ban Russian gold.

The decision to ban did not have a significant impact on the price of an ounce or on the directional expectations of gold.

Russia is the second largest exporter of gold in the world, and according to Russian customs data, it exported about 302 tons of the precious metal, worth $17.36 billion, at the end of 2021.

The report


“The market reaction to the Federal Reserve’s July meeting may encourage a further sustained decline in the dollar and return to investment in higher risk assets. This may benefit gold, but may risk strengthening the Fed’s resolve,” said the World Gold Council.

In July, gold fell 3.5 percent, leaving it down 2.9 percent on an annual basis at $1,753 an ounce.

In the first half of last month, a strong dollar and strong real yields weighed on gold. But weak inflation expectations in the middle of the month and jobless claims a few days later in the US pushed the dollar and real rates lower. Thus, after facing a decline of 6.2 percent in the middle of the month, gold rose to end the month down by only 3.5 percent, according to the report.

It is noteworthy that gold prices rose on July 28 to its highest level in three weeks after Federal Reserve Chairman Jerome Powell indicated that the US Central Bank may slow the pace of raising interest rates in the coming months, which affected the dollar and US Treasury yields.

According to the report, “Historical analysis shows that the current futures market position in gold, the dollar, and 10-year US Treasury bonds combined, can indicate a good potential for positive future returns for gold.”

Factors affecting the price of gold


The World Gold Council enumerated some of the factors that affected the performance of gold in the past month, including:

  • Large outflows from global gold ETFs, and additional falls in gold futures positions.
  • Weak Brent crude prices due to weak growth data and lower implied volatility also contributed to the gold weakness.
  • The continued rise of the dollar.
  • Lower bond yields, on the back of weaker growth expectations in the latter part of the month, boosted gold.

And the American investment bank “Goldman Sachs” recently raised the target price of gold at the end of 2022 to $2,500 per ounce, which points to the strength of 2022 as gold prices in 2021 ended down about 4 percent. It indicated that next year may lead to an increase in fears about an American recession, which will lead to a rise in gold prices.

However, the US bank believes that further monetary tightening and the continued strength of the dollar may constitute headwinds. “As many countries grapple with economic weaknesses and cost-of-living shocks continue to constrain spending, consumer-driven demand is likely to weaken, although there must be pockets of strengths.”

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