Top Stories This Week: Gold Reacts to Market Chaos, Yen Carry Trade Unwind Not Over Yet

The gold price dropped significantly on Monday (August 5) as global markets faced volatility, sinking as low as the US$2,375 per ounce mark after closing the previous week around US$2,440.

Diverse factors were at play that day. A weaker-than-expected US jobs report released on August 2 stoked fears about a recession, with only 114,000 jobs added for the month of July compared to the 175,000 expected by analysts.

However, the Bank of Japan's interest rate hike has been widely identified as the bigger culprit for Monday's selloffs. It surprised market watchers by raising rates to 0.25 percent on July 31, the highest level in a decade and a half.

The central bank also left the door open to further increases in 2024, depending on economic conditions.

Why exactly did that move spark a market meltdown? Experts are pointing to the yen carry trade, a strategy that involves borrowing money in a place where rates are low and using it to generate returns in a place where rates are higher.

Japan's years of near-zero rates have made it a popular destination to borrow money, and investors have been able to use those funds to make gains in lucrative areas — for example, US tech stocks. While that might sound like a simple way to profit, carry trades tend to involve high amounts of leverage, making them potentially very risky.

That risk element is what played out this week — the value of the Japanese yen was already on the rise ahead of the Bank of Japan's rate hike, and that boost pushed it even higher, spooking those involved in carry trades around the world.

The question now is whether global stock market chaos is over or just beginning. While major US indexes have shown signs of recovery, a JPMorgan Chase global FX strategist told Bloomberg the unwind is only 50 to 60 percent complete.

Gold was back above US$2,400 as the week drew to a close.

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