Gold Prices Poised to Rise Amid Diversification Shift

With the US market closed for a public holiday, an analyst took a closer look at gold fundamentals. The expert noted that central bankers tend to buy gold on schedule and occasionally on dips, with their goal being to maintain currency stability rather than generate profits.

The net action in August was a purchase of 23 tonnes, led by China's buying activity. However, Russia and Turkey are still selling gold to defend their local currencies, albeit at much lower volumes compared to China.

Hedge funds typically drive short-term price fluctuations, while miners contribute to the market with relatively consistent trading volumes. The analyst emphasized that gold is a non-producing, non-yielding asset, making it vulnerable to changes in interest rates and Treasury yields.

The conventional wisdom suggests that high yields are bad for gold, as investors tend to flock to Treasuries instead. However, the expert argued that this may no longer be true due to diversification efforts by institutional investors seeking safe-haven assets.

A comparison of market capitalization between US bonds and gold shows that the bond market is roughly double the size of the gold market. This makes gold prices susceptible to diversification flows into the metal, which can easily move prices.