The gold market has witnessed three distinct phases of momentum swings so far this year. However, these shifts do not represent a fundamental re-pricing of its long-term value drivers, but rather a fierce contest of liquidity conditions within the short-cycle environment.

The stable undercurrents this year remain anchored by the sustained central bank buying and reserve diversification trend, which provides solid long-term support. The primary uncertainty stems from the liquidity path shaped by the interplay between geopolitical tensions and the policy impacts under the new Federal Reserve leadership.

Since July, gold has completed its first leg of recovery, driven by a correction of overly hawkish tightening expectations grounded in fiscal constraints. On one hand, marginal cooling in US employment and inflation has eased the persistence of tightening bets. On the other, prolonged geopolitical frictions and rising debt supply pressures have lifted term premiums on Treasuries, enhancing gold's value as a hedge against sovereign credit risk.

The slope for a second trend rally hinges on confirmation of substantive easing from the Federal Reserve. Looking through near-term data, the asymmetry of monetary policy, which leans easier rather than tighter amidst the current technology contest, suggests this gold uptrend is far from over.

Three Distinct Market Phases Marked by Mutual Reinforcement of Flows and Volatility

The first phase, spanning January to February, saw gold accelerate its upward trajectory. Global gold ETFs added 120 tonnes in January, with assets hitting record highs, as Asia and North America contributed 62 tonnes and 43 tonnes respectively. Concurrently, options trading and market volatility spiked, with multiple large intraday swings in late January.

The second phase, from March to June, brought a continuous correction from highs. Flows turned negative accordingly. Global gold ETFs saw a net outflow of 45 tonnes in the second quarter, primarily led by North America, while some Chinese investment funds and Western trend-following strategies also reduced their gold positions. By end-June, both prices and market positioning had cooled considerably from the year's peaks.

The third phase, from July onwards, saw gold base-building around $4,000-$4,200 per ounce before initiating its first repair. Notably, flows improved ahead of the August price rally, with global ETFs recording a net inflow of roughly $3 billion (23 tonnes) in July, ending two consecutive months of outflows. Europe emerged as a key inflow region, Asia continued its accumulation, and North America shifted back to modest inflows from net selling.

Short-Cycle Liquidity Dynamics, Not Long-Term Logic, Dictate the Swings

Gold's short-term volatility is predominantly driven by liquidity conditions and private positioning, as reflected in ETF flows, which determine the slope and amplitude of moves. Its long-term trend, however, is anchored by US fiscal credibility, changes in the global monetary system, and central bank reserve diversification, which establish the pricing center and floor support.

This year, stable factors include persistent US fiscal deficits, high interest burdens, and central bank gold purchases providing medium-to-long-term support. The true variable lies in the monetary liquidity path. Expectations are jointly shaped by geopolitical conflicts and the new Fed leadership's policy stance, with the former influencing policy expectations via oil and inflation, and the latter directly altering market perceptions of the Fed's reaction function. Together, they have pivoted gold from early-year gains into the two adjustment phases.

In the first phase (March-April), geopolitical escalations pushed oil prices higher, firming inflation pressures and triggering gold's initial pullback. In the second phase (June), the new Fed leadership's impact further reshaped expectations of the reaction function, leading to another downturn.

July Signals: A Convergence of Eased Tightening Bets and Credit Narratives

The core signal in July was not the start of an easing cycle, but rather that high interest rates alone were no longer sufficient to suppress gold. Pricing dynamics pointed in two directions: first, cooling employment, inflation, and consumption prompted a correction in sustained tightening bets, easing short-cycle liquidity pressures; second, prolonged geopolitical tensions, fiscal deficits, and rising term premiums enhanced medium-term credit hedge demand. The former reduced headwinds while the latter lifted tailwinds, driving the repair into a phase where liquidity and credit narratives resonate.

First, US employment continued cooling, inflation stayed relatively benign, and the singularly hawkish pricing of the new Fed leadership began to unwind. Labor market tightness has markedly decreased, with new hiring demand nearly stalling. Wage and labor supply indicators also point to loosening conditions. Consumer data further reinforced the picture of a decelerating economy. Following these releases, markets reassessed the unilateral tightening logic. As of August 17, market-implied odds of a September rate hike had fallen to about 33%, down notably from 51.2% a month earlier.

Second, geopolitical conflicts have transformed from a one-off event into persistent constraints on energy, fiscal policy, and overall policy settings, bringing fiscal credibility back into pricing and strengthening credit hedge demand. Prolonged tensions are gradually pivoting from a pure short-term rate suppressor to a long-term policy support factor. With the Strait of Hormuz facing interruptions and US-Iran military and economic frictions repeatedly escalating, what once looked like a temporary shock now appears enduring.

This long-term geopolitical friction supports gold through three channels: higher energy prices pressure government finances aimed at maintaining growth and stabilizing living costs; increased defense, energy security, and supply chain restructuring expenditures widen fiscal deficits and borrowing needs; and when long-end rates rise to levels threatening fiscal stability and financial conditions, markets elevate expectations for policy intervention, liquidity support, and future easing. The term premium on 10-year Treasuries, as per the New York Fed's ACM model, climbed from about 0.51% on June 30 to around 0.84% on July 31, a one-month jump of about 33 basis points, reaching near 0.90% by August 17. Even with cooling employment and inflation, long-end yields now demand higher duration risk compensation. The US Treasury's subsequent move to raise its single-operation liquidity repurchase size for 10- and 30-year bonds to at least $4 billion from $2 billion underscores official sensitivity to long-end liquidity and term risk. While this operation is not equivalent to QE or debt monetization, it highlights growing constraints on fiscal and monetary policy when long-end rates persistently rise. For gold, this is significant: if long-end yields rise due to improved growth and real returns, it typically pressures gold; but if they stem from fiscal deficits, bond supply, and policy credit risk, gold and long-end yields can rise in tandem.

Third, central bank gold purchases and reserve diversification continue to provide a floor. In the second quarter, global central banks bought a net 289 tonnes, about four times the revised 57 tonnes in Q1 and a record for that quarter. The National Bank of Poland added 51 tonnes, the People's Bank of China 33 tonnes, and Uzbeck, Kazakh, Jordanian, and Czech central banks also remained net buyers. Practical evidence of this strategicization includes the continued trend of gold repatriation and the establishment of new regional trading and settlement infrastructure. India has raised its domestic gold holding ratios, France has standardized swaps of New York gold to Paris custody, and discussions in Germany and Venezuela over offshore control have intensified. Infrastructure builds in Hong Kong's gold market further attest to gold's rising strategic role. The clear direction: gold is transitioning from a passive historical asset on central bank balance sheets to an actively managed strategic reserve.

Fiscal Credibility Skews Direction, But Monetary Policy Sets the Next Rally Slope

As US fiscal issues shift from long-term expectations to near-term market constraints, gold appears to have completed its first valuation repair, moving from an "overly hawkish pricing" toward a more balanced view of fiscal and monetary direction. Since July, gold has recovered from around $4,000 to $4,600 per ounce. This repair is not rooted in actual easing but in a market shift from a unilateral "high rates, strong dollar, sustained tightening" stance to one that simultaneously prices in cooling economic data, fiscal credit risk, and the possibility of a monetary policy turn.

After this first repair, fiscal credibility and central bank purchases can lift the pricing floor and limit downside but are unlikely to independently dictate the near-term rally slope. A second phase of trend upside needs confirmation of substantive easing. Key signals to watch include: sustained labor market cooling that shifts policy focus from inflation back to employment; inflation staying contained and the Fed's tolerance for some energy-driven price pressures; and whether North American gold ETF flows transition from tentative inflows to a durable trend. These three factors will decide whether easing expectations convert into policy facts and portfolio confirmation.

Looking through near-term data, the Fed's policy foundation serves the US economy's and financial system's fundamental interests. Amid the current technology contest, the structural bias for monetary policy is easier rather than tighter, a policy asymmetry that underpins the unfinished nature of this bull run. As articulated previously, the so-called Fed independence and monetary frameworks are adaptable over time, as evidenced in the 1970s. For the US, the priority is maintaining technological leadership to ensure monetary and financial stability, followed by social stability risks inherent in K-shaped divergence, with inflation levels taking a back seat. Understanding the US model, its current dilemmas, and the Fed's fundamental stance reveals the long-term thread: in this tech contest, monetary policy leans toward ease over tightness. This asymmetric posture forms the policy basis for why this gold bull market hasn't ended. Technology competition heightens US reliance on long-term capital and accommodative financial conditions; while policy can contract cyclically, it can hardly permit indefinite rises in real rates and financing costs.

Uncertainties persist regarding the sustainability of consumption recovery, whether it continues at a subdued pace or converges back toward trend growth. A prolonged consumption drag would hinder economic momentum. The property sector's recovery also remains in question, having endured a lengthy downturn with only tentative warming signs amid still-negative metrics. Risks also exist regarding data completeness and statistical accuracy. Additionally, tighter-than-expected monetary policy in developed economies could weigh on global growth and asset prices. Geopolitical conflicts remain an unresolved variable, clouding the global growth outlook and market risk appetite.