WGC warns gold market overextended after record ETF demand and $4,000 breakout
NEW YORK (October 9) The gold market has been unable to hold its recent gains above $4,000 an ounce, and while the market could be susceptible to profit-taking in the short term, it’s difficult to ignore the momentum that has driven prices to record highs, according to the latest commentary from the World Gold Council (WGC).
The WGC published its monthly report on gold-backed exchange-traded funds, which showed record inflows during the third quarter, with September accounting for more than 60% of the activity during the period.
According to the report, 145.6 tonnes of gold flowed into global ETFs last month, valued at more than $17.3 billion. For the quarter, ETF holdings increased by 221.7 tonnes, valued at nearly $26 billion.
The analysts noted that the sharp rise in gold prices pushed the value of assets under management to record highs; meanwhile, physical holdings were less than 2% below the record levels seen in November 2020.
In the regional breakdown, North American investors continued to lead the charge in the gold market. North American-listed gold ETFs saw inflows of 88.4 tonnes valued at $10.5 billion last month. The analysts said that investment demand throughout the month and the quarter was driven by similar factors.
“Dollar weakness persisted and now faces further pressure from the government shutdown. However, the dollar looks oversold technically and positionally, risking a short squeeze,” the analysts said. “Expectations of lower yields ahead, as the Fed delivered a 25bps cut during the month, also helped.”
European-listed funds saw their fifth consecutive month of inflows, with September marking the region’s third-strongest month ever for gold ETF activity. European holdings increased by 37.3 tonnes last month, valued at $4.4 billion.
“The ECB and BoE kept rates unchanged in the month, while inflation rose, lowering real rates and increasing policy uncertainty. Flows reflected both protection and momentum as investors sought a purchasing-power hedge and leaned into the breakout. Meanwhile, continued stagflation fears in the UK could be another key factor attracting gold ETF inflows,” the analysts said.
Asian-listed ETFs saw their holdings increase by 17.5 tonnes last month, valued at $2.1 billion.
“We believe the strong gold price performance in local currencies was a key factor. However, India led the region with inflows of US$902mn. We attribute this to favourable local currency dynamics and increased investment demand as investors look for safe havens amid weaker domestic equities and persistent geopolitical and trade risk,” the analysts said.
In a separate report, the WGC warned that robust investment demand — which drove prices to record highs last month — has pushed the market into significantly overbought territory. However, they added that while downside risks are growing, they still see strong fundamentals supporting prices through year-end.
Along with gold’s stretched bullish momentum, the WGC noted that the U.S. dollar is significantly oversold. However, one saving grace for gold could be a volatile equity market, as October is traditionally a turbulent month.
“While our analysis is only indicative, it leaves us somewhat confident that gold will hold its ground and perhaps see further uplift should equities experience a correction, given the plethora of supportive factors elsewhere,” the analysts said. “Perhaps only a major liquidity squeeze could upend both gold and equities, but there are no clear signs of fractures in credit or banking sectors…yet.”
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