Can gold overcome the ‘September curse’?

Key points

• Gold trades cautiously around USD 2500, potentially trying to break the cycle of negative September returns
• Supported by a global economic slowdown lifting the prospect for a more aggressive US rate-cutting cycle
• Shallow corrections have at no point been challenging hedge funds to scale back a USD 59 billion long 

Gold continues to trade cautiously around USD 2500, and in doing so, is trying to break the cycle of negative September returns, a seasonal trend which has seen gold trade lower in all but one of the last ten Septembers. Having suffered a setback to, but not through, support at USD 2470, the yellow metal has bounced back, supported by a global economic slowdown that has raised the downside risk for growth-dependent commodities and equities sectors, but also lifted the prospect for a more aggressive rate-cutting cycle from the US Federal Reserve, which is due to meet to discuss rates on 18 September.

With inflation showing signs of stabilising, the FOMC, which operates under a dual mandate set by Congress focusing on stable prices and maximum employment, is likely to shift its focus towards employment, and increasingly to signs that the job market is cooling. With that in mind, there is now no doubt the FOMC will begin a rate-cutting cycle late this month, which is currently expected to drive the Fed Funds rate down to 3% by December next year. Incoming data, especially those focusing on growth and employment ahead of this month’s meeting, will determine whether the FOMC will go big by cutting rates by 50 basis points.

The outcome of the FOMC meeting later this month, and with that the direction of the dollar as well as geopolitical developments, will all help determine whether gold can break the mentioned “September curse,” which has seen gold yield an average negative return in the last ten years of around 3%. At Saxo, we maintain a long-held positive outlook for gold, and whether history repeats itself or not, even a correction on par with last year’s near 5% drop would not change the bullish narrative, only allowing potential latecomers to join..

Our main reasons for staying long-term bullish on gold are:

• Geopolitical risks related to Russia/Ukraine, the Middle East and not least uncertainty regarding the November US president election.
• Strong retail demand in China amid the desire to park money in a sector seen as relatively immune to a struggling economy and property woes
• Continued central bank demand amid geopolitical uncertainty and de-dollarisation, and not least gold’s ability to offer a level of security and stability that other assets may not provide.
• Rising debt-to-GDP ratios among major economies, not least in the US, raising some concerns about the quality of debt. A worry that saw record demand in Q2 from rich individuals and wealthy family offices through the OTC market.
• In addition, we are now increasingly seeing the positive impact of an incoming US rate cutting cycle, a period that historically has seen the yellow metal perform well.
• Rate cuts could see interest rate-sensitive investors, especially those in the West, return to gold via ETFs, which have seen consistent net selling since 2022 when the FOMC began its aggressive rate-hiking campaign.

So far, the continued absence of selling from traders looking to book profit highlights the yellow metal’s underlying strength. In addition, the shallow corrections seen throughout the rally, which began last October and picked up pace between March and April, have at no point been challenging technical levels that would force hedge funds to scale back a net long, which at 237,000 contracts and a nominal value of USD 59.2 billion, is the biggest since March 2020.

Since hitting a fresh record high last month at USD 2531.75, spot gold has since been consolidating within a 60-dollar wide range, currently offering support at USD 2470 ahead of trendline and 50-day moving average support at USD 2435.