Gold price has corrected about -7% over the past weeks, after making a record high of US$ 2060/oz earlier in the month. While further weakness appears likely, we remain bullish on the yellow metal as factors driving its price higher, e.g. low yields, expansionary monetary policy, etc, remain intact. In this article, we reveal the persistently strong positive correlation between gold ETF holdings and gold price. Signs that ETFs have resumed accumulating gold remain supportive of the yellow metal.

ETFs Resumed Gold Accumulation

Demand on gold can be divided in four categories, namely, jewelry, investment, central bank buying and technological developments. Investment demand can be further divided into purchase of gold bars and coins, and ETFs. Data from World Gold Council shows that ETFs’ gold holdings took up over 43% of total gold demand in 2Q20, up from 28% in 1Q20 and markedly higher than 9% in 2019. This sharp increase suggests that ETF buying is a key driver of gold’s rally over the past months.
Discussion on gold price has been concentrated on its relationship with US Treasury and US dollar, many have ignored the strong and long-lasting correlation between gold ETF holdings and gold price. Indeed, the  two have demonstrated very strong positive correlation (over +0.9) for decades. The most recent 90-day correlation is +0.93 with gold ETF holdings leading for about 10 days. As indicated in the chart below, gold ETF holdings peaked at 81M oz on July 22. This was followed by peaking of gold price on August 8. Selling of gold has been modest despite the price correction. On the contrary, there are signs that ETFs have resumed accumulating the yellow metal over the past week. For instance, holdings of SPDR Gold Trust, the world’s largest gold-backed ETF, recovered to 40.3M oz on August 18, after slipping to 40.1M oz on August 14. If the trend continues, we expect gold’s correction could end in coming weeks.

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Rebound in Treasury Yields would be Short-Lived

Recovery in Treasury yields is also a reason for the gold’s recent correction. However, as long as Fed continues its accommodative monetary policies, any rebound in yields would be short-lived. Fed Chair Jerome Powell’s speech at the Jackson Hole symposium Thursday will offer more hints about the central bank’s policy outlook. This will prepare the market for formal announcement about the results of Fed’s Monetary Policy Review in September. As we mentioned in the previous report, we expect the Fed adopt average inflation targeting, aiming for 2-2.5% inflation when the economy is at or near full employment. Tolerance of higher inflation suggests that the Fed would maintain loosening monetary policy for longer.  Meanwhile, the Fed will also adopt an outcome-based forward guidance, pledging to maintain the current target range for the federal funds rate at least until one or more specified economic outcomes was achieved. Both measures would send a more dovish bias to the Fed’s monetary policy stance. We also noted at the report that stalled hopes on the fiscal stimulus suggests that the central bank would have to shoulder more responsibility on growth boost. Persistent low yield environment would remain supportive of gold price, given the strong strong negative correlation between.

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