Gold prices were strong during 'risk-off' days in May

Broad Markets 

• Stock markets across the globe finished the month sharply lower, their worst monthly return since the December 2018 sell-off. Monthly stock returns globally: (US Tech -9%, Japan -8%, EM -8%, US S&P 500: -6%, Europe -6%, China -6%). 
• US/China trade rhetoric continues, but the most recent downturn is related to the surprise announcement that the US plans to impose tariffs on Mexico in the coming weeks.
• Commodity prices fell last week, led by oil which dropped 8% on the week and a cumulative 15% in May. 
• 3m/10y curve is the most negative it’s been since the financial crisis at -20bps. Interestingly, the 2y/10y curve actually steepened last week, despite falling yields, as the probability of a Fed rate cut this year skyrocketed to nearly 100%. 
• The December forward rate in the US is 1.75% signaling the market expects 2-3 rate cuts this year (Probability of a cut: 50% by July and 80% by September). The German 10y yield appears to be at an all-time low of -20bps. 

Fed Rate cut probabilities

Source: Bloomberg

Gold movements:

• Gold rose sharply last week (LBMA 0.9%, XAU 1.6%), mainly during Friday’s stock market sell-off
• Despite the flight to quality, the US dollar was mostly unchanged -0.1, with gold assuming the safe-haven-asset role during the week. 
• Gold finished the month 1.71% higher (the strongest month since January this year); gold is higher by 1.9% on the year, while long USD gold is higher by 4% on the year, now outpacing emerging market stock performance in USD terms. 
• We often highlight gold’s role as a safe haven during periods of pronounced sell-offs or an increase in systemic risk. Gold was relatively flat when there were small movements in the market over the course of the month, but looking at periods when the US stock market was down more than 1% in a day (4 times), gold was higher by 90bps on average each of those days.
• Technicals – Gold broke out strongly to the upside last week (above its 200d moving average and downtrend resistance line) and is continuing this trend to begin this week. Technical traders will focus on the $1,365 level, which has been a multi-year resistance level.

Gold Price

Source: Bloomberg

• Options: Gold options put/call skew is the highest it’s been since 2016 (the difference between the implied volatility in calls versus puts). This is also reflected in call skew (at-the-money implied volatility versus upside implied volatility), which is in the 96th percentile over the year, and in put skew (at-the-money volatility versus downside implied volatility) which is in the 2nd percentile over the past year. This means that investors are paying an extreme premium for upside exposure in gold, and not paying a premium for downside exposure. This is bullish.

Gold put/call skew (3-month 120% - 80% strike options)

Source: Bloomberg

• ETF Flows: Globally, gold-backed ETFs experienced inflows of US$361mn last week, coming from all regions; What started as meaningful outflows to begin the month, concluded with only minor outflows, largely because North America reversed many of its losses late in the month. Global outflows were $200mn on the month or 20bps of total assets. North American funds lost 1.2% of its assets while European funds gained 1.2% in assets. Asian fund continue to have strong outflows, losing 6% on the month and 17% this year. We will be releasing our monthly (May) gold-backed ETF flows report this Thursday at 8am EST, which will provide in-depth color on market activity.