After a period of significant capital outflows, gold has staged a powerful rebound. Data shows gold prices rose 7% last week, marking the best weekly performance since February this year. It has reclaimed key technical moving averages and ended a downtrend that began in March. This breakout rally has reversed the previous market pessimism, with capital returning, central banks continuing to buy, and expectations of a Federal Reserve rate hike cooling. A new upward trend for gold is gradually taking shape.
Multiple Factors Converge to Push Gold Above $4,300 per Ounce
The strength of this gold rebound is exceptionally strong. Last Wednesday, gold futures surged 4% in a single day, breaking above the $4,300 per ounce mark, the largest single-day gain since February. Gold prices also hit a seven-week high, surpassing the technical support of the 50-day moving average and breaking the weak, range-bound pattern of the past several months. This powerful rally is the result of lower U.S. Treasury yields, a weaker U.S. dollar, and optimistic expectations regarding Iran nuclear talks and the resumption of shipping through the Strait of Hormuz.
The surprise miss in U.S. nonfarm payrolls data has reinforced optimism for gold. Data showed the U.S. economy added 23,000 fewer jobs in July than expected, a significant deviation from the market's forecast of an 83,000 increase. This weak employment data led the market to quickly adjust its predictions for Federal Reserve rate policy. The CME FedWatch Tool shows the probability of a Fed rate hike in September has fallen to 41.9%, down from 67% a week earlier. Market expectations for further Fed rate hikes have notably cooled.
Extreme Reversal in Capital Flows: From Billions in Outflows to Capital Returning
Gold's previous slump was due to an unprecedented investor retreat. According to data from Baird Strategas, the rolling 125-day capital flow for precious metals ETFs was near a peak of $400 billion in February, but had fallen to nearly -$200 billion by early last week. This represents a decline of over $550 billion from the February peak, hitting the lowest level on record since 2015. The "gold rush" seen at the start of the year had nearly dissipated.
The reversal in precious metals ETF capital flows is now underway, with the first buyers returning. Chinese gold ETFs have recently attracted capital inflows for 14 consecutive trading days, accumulating approximately $12 billion. Global physical gold ETFs also reversed two consecutive months of net outflows in July. According to the World Gold Council, global physical gold ETFs saw a net increase of 23.5 tonnes in July, valued at about $2.97 billion. European-listed funds contributed the most, adding 17.3 tonnes (approximately $2 billion) in the month, with funds from the UK and Switzerland collectively seeing inflows of $1.5 billion. North American funds added a modest 0.3 tonnes (about $71 million), while Asian funds continued to steadily increase holdings by 4.8 tonnes (approximately $616 million).
This capital structure has created an unusual pattern for gold: long-term buyers have never fully left the market, while fast money and ETF investors have mostly been cleared out. Goldman Sachs estimates that commodity trading advisors (CTAs) currently hold short positions in gold worth about $9 billion. In Goldman Sachs' most optimistic scenario, these funds could turn into holding over $10 billion in long gold positions within the next month, with a potential reversal scale exceeding $20 billion.
Central Banks Continue Buying, Building a Solid Floor
Beyond the return of private investors, official sector gold purchases continue to provide structural support for gold prices. The People's Bank of China increased its gold reserves by 20 tonnes in July, the largest monthly net increase since October 2023, extending its streak of consecutive monthly purchases to 21 months. Krishan Gopaul, an analyst at the World Gold Council, stated that the July increase brings China's official net purchases this year to 60 tonnes, with total reserves rising to 2,366 tonnes.
Other official institutions are also following suit: the Czech National Bank added 1.7 tonnes in July, bringing its total purchases this year to 12 tonnes. The Bank of Korea's restart of gold purchases after a 13-year hiatus has also drawn market attention. A recent survey by the World Gold Council shows that 89% of reserve managers expect global official gold holdings to increase over the next year, while a record 45% of respondents expect their own institutions to increase gold holdings. Tony Kim, a senior trader at Goldman Sachs, stated that central bank gold purchases provide a floor of support for gold prices near $4,000.
What's Next for Gold?
The short-term path is relatively clear. Gold needs to hold the $4,000 round number and maintain its position above the newly broken downtrend line. On the upside, its 200-day moving average (near $4,500) is a key resistance level and a technical hurdle that must be cleared for gold to advance further.
The bond market remains the biggest obstacle. Gold does not generate interest, so rising real interest rates increase the opportunity cost of holding it. However, historical experience shows that when the market has deep concerns about the inflation outlook, expanding fiscal deficits, or the credit system of fiat currencies, nominal yields and gold can decouple from conventional logic and rise in tandem.
Todd Sohn, an ETF strategist at Baird Strategas, said, "[ETF] capital flows suggest that the threshold for tactical long positioning is low." With gold prices breaking through key technical levels, significant potential for short covering, and central bank purchases providing a solid foundation, the gold rally has room to continue. Analysts at UBS point out that while short-term trading risks and volatility remain, from a medium to long-term perspective, gold is expected to gradually approach $5,000 per ounce by 2027.
Looking ahead, U.S. inflation data, the progress of U.S.-Iran talks and the situation in the Strait of Hormuz, and subsequent comments from Federal Reserve officials will be key focal points for investors. Any unexpected developments in either direction could act as a catalyst for the next phase of gold price movement. As of the time of writing, spot gold is trading at $4,320.66 per ounce, down 0.5% on the day.
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