Strong activity in gold options spreads likely reflects changing expectations for interest rate and election risks in the second half of 2024, according to the World Gold Council (WGC).

In its latest monthly report, the World Gold Council noted that a typically “benign” and “often overlooked” segment of the gold market is experiencing renewed interest, suggesting investors are either hedging or speculating on both the rate cut cycle and and with the outcome of the US election.

The Board found that options spread positions (OSP) within the Commodity Futures Trading Commission (CFTC) Trader Engagement Report continued to increase, approaching levels not seen since 2019-20. and before that, 2013 and 2011.

"Looking back over these periods, it appears that the triggers for the increase in OSP activity were related to one of two scenarios: either a change in interest rate policy or a market risk event," the WGC said.

Summer of 2011 was notable for the debt ceiling crisis, it said, which at the time drew bets that there would be the first-ever US government default.

Fast forward eight years to 2019. a surge in options spread positions increased as investors speculated about the start of the Fed's tapering cycle, which materialized in July of that year.

Shortly thereafter, the emergence of COVID-19 led to another spike, along with a rise in implied volatility.

"A further and more recent hike, in December 2023, came amid modest 'language' from the Fed but no rate cuts," the WGC said.

"We conclude from these historical episodes that the risks of market events and changes in interest rates are likely to be drivers of OSP increases. Today we face both.

"Markets expect the Fed to go down a surprisingly aggressive rate-cutting path in September, and we have a systemically critical US election in early November."

Amid this near-term uncertainty, investor behavior reflects a strong belief in gold as a hedge against risks from immediate events, the WGC explained, while positioning it to benefit from lower interest rates.

Looking back to August, the WGC reported that the crude saw another solid rally to end 3.6% higher at US$2,513/oz. Notably, it also hit a new record high of $2,531.60 on August 20, although it has fallen slightly since then.

Gold ETFs continue hot streak

Renewed positive sentiment around gold from Western investors helped global physical-backed gold ETFs extend their streak of inflows to four months, adding US$2.1 billion in August.

Those "non-stop" inflows between May and August helped global gold ETFs' year-to-date losses narrow to US$1 billion.

"All regions reported positive flows [and] Western funds again contributed the lion's share,” the WGC said.

Asian funds extended their streak of inflows to 18 months, although adding US$32 million was the least since May 2023, and North America saw its second straight month of inflows, adding US$1.4 billion.

European funds attracted US$362 million, their fourth straight monthly inflow. According to the WGC, market volatility and the demise of the popular "yen carry trade" likely boosted demand for safe havens as gold ETFs simultaneously saw increased inflows into the region.

Australia also recorded its third consecutive month of inflows of US$66.3 million in August. Inventories rose by 2.16% to 41.4 tonnes.

Total gold global assets under management, benefited from inflows and rising gold prices, rose 4.5% to a new month-end high of US$257 billion.