The appreciation of the Indian rupee, following tariff relief discussions with the US, led to a 3.5% drop in local gold prices. Similarly, a surge in the renminbi resulted in a decline in gold prices within China. The Gold Return Attribution Model (GRAM) indicates that the weaker US dollar, particularly against emerging market currencies, played a crucial role in gold's positive return. Additionally, lower 10-year US Treasury yields contributed to the upward trend. However, the model did not fully account for the positive return, suggesting that strong Asian buying, especially during Asian trading hours and on the Shanghai Futures Exchange, provided additional support. 

Gold ETFs saw significant inflows, with US$5.3 billion added to assets in February, led by North America and Asia. Europe, on the other hand, recorded outflows of US$1.8 billion. Managed money net long positions on COMEX experienced a sharp contraction in early February, before gaining momentum towards the end of the month. 

US dollar's temporary respite

The US dollar index (DXY) experienced a temporary bounce in January, avoiding a technical downside breakdown due to positive economic surprises and supportive futures positioning. However, experts believe this is merely a temporary respite. A medium-term downtrend in the US dollar is expected to resume, which could further support gold prices. 

"The downward trend in the US dollar index is likely to resume post this near-term bounce and is, in our view, a key positive force for gold prices going forward," said a market analyst. 

Several factors contribute to this anticipated dollar weakness. The US dollar and US equities remain expensive compared to historical standards and other countries. The "double reward" for foreign investors, consisting of strong US equities and a strong dollar, is fading, with Europe and Japan offering viable alternatives. Additionally, the weaponisation of the US dollar following the Ukraine invasion has made central banks and investors more cautious about US exposure. 

Geopolitical tensions and market responses

The geopolitical landscape also played a significant role in shaping asset prices. The Middle East conflict that erupted at the end of February led to immediate reactions in the markets. Oil prices climbed, the dollar rallied, and yields softened somewhat. Gold also experienced a bounce, rising nearly 5% across two trading sessions. Historically, gold has responded positively in about two-thirds of instances where geopolitical tension has spiked significantly.

"Heightened geopolitical risk, particularly involving Iran, has contributed to the recent rally in gold prices," noted a financial strategist. 

Despite the current dollar bounce being bolstered by the conflict, experts believe it is likely short-lived. A resumption in the downtrend of the dollar should continue to support gold prices. 

Global gold ETF inflows

February marked the ninth consecutive month of inflows for global physically backed gold ETFs, adding US$5.3 billion. This represents the strongest two-month start to a year, as investors continue to build allocations amid elevated geopolitical risk and shifting macro conditions. Total global holdings rose to an all-time high, increasing by 26 tonnes in the month to 4,171 tonnes. 

"North America once again led global demand; Asia extended its steady run of inflows, and Europe stood out as the only region to record net outflows," observed a market analyst. 

North America added US$4.7 billion in February, marking its ninth consecutive month of inflows. This sustained run is notable, as it mirrors periods of elevated systemic risk, such as the Global Financial Crisis and the COVID-19 pandemic. 

In contrast, Europe recorded outflows of US$1.8 billion, primarily due to heavy redemptions in the first week of February. The UK accounted for the bulk of these redemptions, reflecting its prominent share of the region's gold ETF market. 

Asian funds expanded inflows for the sixth consecutive month, attracting US$2.3 billion in February. Japan led inflows in the region, supported by political uncertainty, escalating tensions with China, a weakening yen, and gold's strong performance in the currency. 

Overall, the global gold market remains robust, with trading volumes averaging US$478 billion per day in February, despite a pullback from January's record high. The combination of dollar weakness, geopolitical uncertainty, and central bank diversification into gold continues to create a favourable environment for the precious metal.