Act I — fundamentals restore the floor

Positioning was exceptionally lean heading into the August rally. Investors were reluctant to buy the dip while persistent inflation kept the risk of renewed Fed tightening alive, but there was equally little conviction behind building large outright shorts. Despite a roughly 30% retracement from the year’s highs, medium- and long-term sentiment remained constructive, with many investors waiting for a better level and clearer signals to start rebuilding strategic exposure.

Repeated failures to sustain a move below the psychological $4,000 level gradually restored confidence. Evidence that official-sector buyers were using lower prices to increase purchases reinforced that floor: aggregate central-bank buying rose as prices fell, with China particularly notable. Physical flows were also more resilient than we had expected. China’s imports remained well above both last year’s pace and historical averages. India’s imports continued to face regulatory headwinds, but seasonal patterns appear to be asserting themselves. Taken together, these trends point to stronger fundamental demand support through the second half and into the festive season.
Soft US data provided the catalyst in early August, prompting markets to scale back Fed hike expectations. The speed of the move exposed an underlying upside bias: short-covering drove the initial break higher, followed by fresh long positions. Nevertheless, given summer liquidity is typically thin, leaving the market vulnerable to exaggerated price moves, many market participants have been more tactical and relatively quick in taking profit.

Act II — the debasement trade returns

The second leg began as gold was taking a breather and attempting to rebase around $4,400. The trigger was the US Treasury’s announcement that it would double the size of buybacks in longer-dated bonds. The programme is modest relative to the Treasury market and was originally intended for liquidity management, but the signal was powerful: investors interpreted it as a greater willingness to lean against pressure at the long end of the curve. Fiscal credibility and debt sustainability, long-running arguments for strategic gold exposure, moved back to the centre of the debate.

Fiscal and debt concerns trigger investor gold interest, regardless of what it is called

Whether framed as “de-dollarisation”, “de-fiatisation” or “debasement”, the portfolio implication is similar: gold can serve as a diversifier, a hard asset and a source of resilience across a wider range of macro outcomes. Its relationship with rates has shifted again. Higher real rates raise the opportunity cost of holding a non-yielding asset, but the reason yields are moving matters. If higher long-end yields reflect fiscal risk or deteriorating confidence in sovereign debt, investors may be more willing to look through that cost. Concurrent dollar weakness adds a further tailwind, reinforcing gold’s role as an alternative to fiat currencies.

Epilogue — upside risks are building

We maintain our view that gold prices are headed higher and acknowledge that upside risks to our medium- and long-term forecasts have increased. The immediate focus is Fed policy and Chair Kevin Warsh’s Jackson Hole speech. Monetary and fiscal signals currently appear to be pulling in different directions: the Fed remains focused on inflation discipline, while the Treasury has acted to ease pressure at the long end. Investors will be looking for guidance on how this tension evolves. Comments from both the Treasury and the Fed will be parsed more closely than ever. Given the lack of forward guidance, economic data prints will also become increasingly important in framing Fed policy expectations and the corresponding read through to gold’s price outlook.

What would make us more bullish?

The clearest upside scenario is one in which fiscal and debt concerns become embedded in strategic asset-allocation decisions. That would encourage a broader and more persistent build in gold holdings than our base case assumes, extending the rally both higher and for longer. Evidence of sustained central-bank buying, continued resilience in Asian physical demand and a weaker dollar would reinforce that outcome. Other bullish scenarios include softening economic data, dovish Fed surprises or renewed concerns around Fed independence.

What could interrupt the rally?

Gold would not be immune to a hawkish Fed. A rate hike this year, or guidance that materially raises its probability, could trigger a knee-jerk move lower through higher real rates and renewed dollar strength. Thin liquidity and the speed of August’s gains could amplify that correction. This could happen even in the bullish scenario we described, and as such we would view it as a buying opportunity (all else being equal) rather than the start of a sustained bear trend. A more crucial downside risk for gold would be a scenario where AI investments lead to much stronger economic outcomes, wherein the Fed has space to comfortably raise rates to tame inflation.