Weaker Dollar Supports Gold Demand as Official Buying Offsets ETF Outflows

Gold's recent price dip is less significant than the shift in market positioning. In February, long gold was the most crowded institutional trade at 50% of respondents, but by July it had dropped out of the top five as capital rotated into semiconductors, which became the most crowded trade at a record 82%. This change has left a net 5% of fund managers viewing gold as undervalued, the strongest reading since March 2023 after more than a year of overvaluation.

Central banks continued to support gold by adding a net 289 tonnes to reserves in Q2, up 62% year over year. This offset the 45 tonnes of ETF outflows, which reflected retail selling. Meanwhile, physical bar and coin demand fell only 3% in Q2 and remained 21% higher in the first half.

A weaker dollar made gold cheaper for non-US buyers, supporting demand when sentiment weakened. The Fed's decision to leave interest rates unchanged has left markets focused on incoming data rather than policy certainty, while suspected Japanese intervention drove the yen to its biggest gain since 2022, weakening the dollar and improving gold's appeal.