Gold Market Commentary

Inflation, falling yields and the US dollar pushed gold higher 

Key highlights:

  • The gold price rebounded 4.5% on the month,1 as inflation concerns grew and the US dollar weakened
  • Gold remains down 6% y-t-d, but has moved up closer to the psychologically important US$1,800/oz level
  • Sentiment via COMEX futures increased as net positioning rose 10% off March low
  • Outflows in gold ETFs continued, but slowed considerably in April – less than a fifth of those seen in March
  • China gold investment activity was muted in April as reflected in lower local trading volumes,2 but jewellery demand could receive a boost from postponed weddings
  • Surging COVID cases in India are raising concerns that the demand recovery seen in Q1 will slow
  • Swiss gold exports hit 10-month high in March, driven by higher demand in Asia
  • Looking forward, we expect inflation concerns and the direction of rates to remain an important driver of gold prices, while rising COVID cases could weigh on consumer demand but support investment.

Most asked investor questions:

Gold rebounded as inflation concerns rose and dollar weakened

Marking a turnaround from the first three months of the year, gold rebounded 4.5% in April to finish the month at US$1,768/oz - its highest monthly closing level since January and its first positive monthly return since December 2020. While gold is still 6% lower y-t-d, its strong April performance was echoed across several key currencies throughout the month (Chart 6, p. 8). Gold found resistance at US$1,800/oz during the month, suggesting it might need an additional catalyst to move above that level.

Sentiment towards gold was positive in the futures market, with net long positioning3 on COMEX recovering from the 30 March low (the lowest level since 2019). Net longs grew to 540t (US$31bn), 10% higher in tonnage terms than at the end of March.4 While the move was positive, it might be too early to conclude that it represents a significant bullish shift given that net positioning remains low compared to recent levels. Adding to this, while outflows in gold-backed ETFs continued throughout April, they did so at a much slower pace as European funds saw net inflows for the first time since January (Chart 9, p. 4).

Our short-term gold return model indicates that gold’s performance in April was primarily driven by a combination of inflation concerns, softer rates, and a weaker dollar (Chart 1).

 

Chart 1: Changes in interest rates and the US dollar influenced gold in April

Changes in interest rates and the US dollar influenced gold in April

Contributions of gold price drivers to periodic gold returns*

Changes in interest rates and the US dollar influenced gold in April
Contributions of gold price drivers to periodic gold returns*
*To 30 April 2021. Our short-term model is a is a multiple regression model of monthly gold price returns, which we group into the four key thematic driver categories of gold’s performance: economic expansion, market risk, opportunity cost and momentum. These themes capture motives behind gold demand: most poignantly, investment demand which is considered the marginal driver of gold price returns in the short run. ‘Residuals’ represent the percentage change in the gold price that is not explained by factors currently included in the model. Results shown here are based on analysis covering an estimation period from February 2007 to April 2021. On Goldhub, see: Short-term gold price drivers. Source: World Gold Council

Sources: World Gold Council; Disclaimer

*To 30 April 2021. Our short-term model is a multiple regression model of monthly gold price returns, which we group into the four key thematic driver categories of gold’s performance: economic expansion, market risk, opportunity cost and momentum. These themes capture motives behind gold demand: most poignantly, investment demand, which is considered the marginal driver of gold price returns in the short run. ‘Residuals’ represent the percentage change in the gold price that is not explained by factors currently included in the model. Results shown here are based on analysis covering an estimation period from February 2007 to April 2021.

On Goldhub, see Short-term gold price drivers

 

During Q1, gold responded mostly to movements in interest rates, but as yields levelled off in April, other drivers gained relevance. The combination of the 11-basis point decline in ten-year Treasury yields and the 1.5% decline in the trade-weighted US dollar index supported gold over the month. However, our model suggests that the respite gold got from the slight pullback in interest rates was offset in part by the fact that rates are still higher on the year, as seen by the small negative contribution that the rates category had on gold’s performance during the month (Chart 1, p. 2). 

In addition, a surge in US breakeven rates and the growing US Federal Reserve (Fed) balance sheet contributed strongly to gold’s positive performance in April.5 The Fed’s signalled tolerance for higher inflation levels as a likely consequence of various rounds of fiscal stimulus and renewed economic growth, as well as its commitment to low interest rates, not only helped to stem the Q1 bond sell-off, but also weighed on the US dollar. While rising interest rates headlined in Q1, inflation now appears to be catching up, suppressing the real component of these rates and further pressuring the US dollar. Investors who shied away from gold in Q1 may now be drawn back in.

Looking ahead – rates dominate but COVID poses risks

Rising inflation expectations and questions around central bank tapering are front-and-centre for investors. Despite recent increases in inflation, central banks have maintained their accommodative stance in words and actions. Markets remain nervously poised for the outcome of rising inflation and central banks' reactions to it. While yields in the US moderated during April, they continued to rise across Europe and parts of Asia. Gold’s increased sensitivity to changes in interest rates means any shift in sentiment resulting in a resumption of bond selloffs could be a short-term headwind.

The trajectory of global COVID cases could also be significant. Cases are surging in India and outbreaks have been seen in various countries. Despite further signs of economic improvement and rallying equity indices, investor optimism for a quick recovery seems to have subsided in April. Should optimism continue to slide in May, we believe this could be positive for safe-haven demand for gold but may weigh on consumer demand. Net positioning in futures on COMEX and gold ETF flows are key indicators that we will be watching.

Regional insights: Cautious optimism for demand in May

China: Traditionally, Q2 is a seasonally quiet time for gold demand in China. Available data for April shows that the average monthly trading volumes of Au9999 on the Shanghai Gold Exchange – usually seen as a high frequency indicator for China’s physical gold demand – declined over the month. But with the elongated International Labour Day holiday starting on 1 May, and the pandemic currently being well contained, we have reason to believe gold demand could receive a boost during this off season.6 Anecdotally, industry contacts suggest that wedding jewellery demand might offer substantial support as many couples plan to hold their delayed weddings during the upcoming holiday – an expectation reflected in a US$11/oz average local gold price premium during April, US$3.6/oz higher than March.

 

Chart 2: Chinese gold demand has led to a jump in imports

Chinese gold demand has led to a jump in imports

Imports of gold into China*

Chinese gold demand has led to a jump in imports
Imports of gold into China*
*Data as of 31 March 2021 Source: China Customs, World Gold Council

Sources: China Customs, World Gold Council; Disclaimer

*Data as of 31 March 2021.

 

Reports during April indicated that the People’s Bank of China has given permission for imports of ~150t of gold. Recent data from China Customs showed imports of 38t in March, 32t higher m-o-m and 20t higher y-o-y (Chart 2). The pandemic-stricken March of 2020 and fewer working days in February 2021 – due to the Chinese New Year’s holiday – were the main reasons for the sizable increases, respectively.

Chinese gold consumption has surged so far in 2021, while imports have been somewhat muted since early 2020, resulting in tightening supply-demand conditions and a domestic gold price spread. Potentially higher imports in Q2 suggests Chinese gold demand could remain higher in our view.

India: Following healthy retail demand in March, consumer demand slowed in April under pressure from surging COVID infections and a rising domestic gold price. Many states have implemented partial lockdowns and only essential businesses remain open. Consumer confidence has dipped, and anecdotal evidence suggests that wedding postponements have risen, impacting wedding purchases. The increasing restrictions have resulted in gradually declining sales throughout April. With lower retail demand, the domestic premium fell to US$0.5-1/oz by the final week of the month, compared to a premium of US$3-4/oz at the end of March.

Looking ahead, Akshaya Tritiya (AT), a major gold buying festival, falls on 14 May. While AT-related gold sales are poised to exceed last year’s low base, the rising number of COVID cases will likely hamper the overall level of demand. Sales may find marginal support through retailers’ digital/omni-channel strategies, something that was still being developed last year.

Other markets: Swiss gold exports jumped to a ten-month high in March, with a notable increase to India, which registered its highest gold imports for a decade (Chart 3). Gold often flows through Switzerland to be refined into gold products popular in Asian markets, and the higher level of exports in March provides further evidence of stronger consumer demand.

 

Chart 3: Stronger gold demand in Asia drives Swiss exports higher

Stronger gold demand in Asia drives Swiss exports higher

Volume of gold exports under HS code 7108*

Stronger gold demand in Asia drives Swiss exports higher
Volume of gold exports under HS code 7108*
*Data as of 31 March 2021. Note: HS code 7108 covers gold, incl. gold plated with platinum, unwrought or not further worked than semi-manufactured or in powder form Source: Swiss Federal Customs Administration, World Gold Council

Sources: Swiss Federal Customs Administration, World Gold Council; Disclaimer

*Data as of 31 March 2021. Note: HS code 7108 covers gold, incl. gold plated with platinum, unwrought or not further worked than semi-manufactured or in powder form.

 

Third straight month of ETF outflows… albeit at a much slower pace

Gold-backed ETF holdings fell for a third straight month, again driven by US funds in North America (Table 1). The 18.3t (-0.5%) global outflows were lower than both February and March, and inflows into European funds suggest there could be a renewed interest in gold ETF investing. Generally, the larger US-domiciled fund flows have greater correlation to gold’s price, but this relationship tends to lag price performance by one or two months, which could signal a reversal for investment demand through ETFs in the coming months, given gold’s recent recovery. Read our full April gold ETF flow commentary on Goldhub.

Table 1: Regional changes in gold-backed ETF holdings*

  AUM (US$bn) Holdings (tonnes) Change (tonnes) Flows (US$mn) Flows (% AUM)
North America 104.0 1,829.2 -28.4 -1,583.5 -1.6%
Europe 87.7 1,542.9 10.6 514.4 0.6%
Asia 7.8 132.4 -0.5 -13.2 -0.2%
Other 3.6 62.6 0 10.1 0.3%
Total 203.0 3,567.2 -18.3 -1,072.1 -0.5%

*To end April 2021.

On Goldhub, see: Gold-backed ETF flows.

Source: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council

 

Most asked investor questions 

Here are our thoughts on the key questions we have received from investors during the past month:

As an alternative to bonds, can gold serve as a portfolio hedge against downside risks?

Prolonged low interest rates have led to a structural shift in asset allocation strategies as bonds have struggled to provide investors with the returns or protection offered in the past. As a result, some investors have reduced bond allocations in favour of alternative assets or have moved bond exposure further out on the credit curve. Both can offer higher returns but come with higher risks. This presents an opportunity for gold to mitigate the risk from such strategies.

 

Chart 4: Treasury and corporate bond returns have fallen below long-term averages, prompting shifts to riskier fixed income assets

Treasury and corporate bond returns have fallen below long-term averages, prompting shifts to riskier fixed income assets

Average 10-year returns using rolling monthly data*

Treasury and corporate bond returns have fallen below long-term averages, prompting shifts to riskier fixed income assets
Average 10-year returns using rolling monthly data*
*Based on 10-year rolling monthly returns from January 2000 to December 2020. Source: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*Based on 10-year rolling monthly returns from January 2000 to December 2020.

 

Could gold benefit from a renewed interest in total return strategies?

Bond performance has suffered in the low-rate environment but so have dividends. According to the Janus Henderson Global Dividend Index, global dividends fell by 12.2% last year due to the economic impact of the pandemic. While the nascent economic recovery has boosted dividends in some markets, an uneven global recovery remains a risk for investors.

Might this result in a greater interest in total return versus income strategies going forward? If so, this could be positive for gold. Despite offering no coupon or dividend as a consequence of having no credit risk, gold’s long-term return has been positive: averaging 11% per year since 1971. A strategic allocation to gold could help reduce an income shortfall as well as protect portfolios from further risks.

What would influence gold’s performance more: high rates or high inflation?

Gold’s relationship with CPI inflation is more complicated than many investors believe, being both time-varying and non-linear. Although CPI inflation is a driver of gold prices, it is often insufficient to influence the price in isolation. Interest rates – viewed as compensation for inflation – have explained returns far better, especially over the last ten years.

Gold’s relationship with money supply is far stronger than with CPI, which means it protects against more than just a rise in the price level of goods and services. It also protects investors against currency depreciation and the risks greater monetary liquidity can bring. With money supply having grown at a faster rate than CPI, this supports the assertion that gold should grow at a positive rate over time.

 

Chart 5: Gold's cointegration with CPI varies but is stable with money supply

Gold's cointegration with CPI varies but is stable with money supply

Significance of cointegrating relationship between gold and CPI as well as gold and money supply

Gold's cointegration with CPI varies but is stable with money supply
Significance of cointegrating relationship between gold and CPI as well as gold and money supply
Recursive plot of Johansen trace statistic of US CPI and US MZM (zero money) scaled by the 5% critical value. Source: "Gold and inflation - A time-varying relationship". When the series is above the zero line, the relationship is insignificant at the 5% significance level. When it is below, it is significant at this level. Source: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

Recursive plot of Johansen trace statistic of US CPI and US MZM (zero money) scaled by the 5% critical value. Source: "Gold and inflation - A time-varying relationship". When the series is above the zero line, the relationship is insignificant at the 5% significance level. When it is below, it is significant at this level.

 

How will stronger consumer demand impact gold’s performance?

Investment-driven factors influence gold substantially in the short term, but over the longer term the interaction between these factors and consumer demand ultimately drives performance. This is crucial to understanding gold’s “dual nature”, being both an investment asset and consumer good. For example, strengthening consumer demand helped to mitigate the impact of gold ETF outflows during Q1 2020 and provided an element of support to the gold price. Both jewellery demand and retail investment saw substantial Q1 increases y-o-y, as lower gold prices and inflationary pressures encouraged a positive consumer response.

The principle that gold’s performance can be reliably explained by the interaction of supply and demand underpins our Gold Valuation Framework, which investors can assess by accessing Qaurum – our web-based gold valuation tool.

Gold market monitor

Table 2: Gold return in key currencies*

  USD EUR JPY GBP CAD CHF INR RMB TRY RUB ZAR AUD
  (oz) (oz) (g) (oz) (oz) (oz) (10g) (g) (oz) (g) (g) (oz)
February -6.5% -6.4% -4.8% -8.2% -7.3% -4.8% -5.8% -6.5% -5.0% -7.6% -5.9% -7.3%
March -3.0% 0.2% 0.6% -1.7% -3.7% 0.9% -3.5% -1.5% 8.3% -1.7% -5.4% -1.4%
April 4.5% 2.1% 3.4% 4.2% 2.3% 1.3% 5.9% 3.2% 4.7% 3.9% 2.7% 3.1%
YTD -6.4% -4.8% -0.9% -7.5% -9.6% -3.4% -5.1% -7.3% 4.5% -4.9% -7.5% -6.5%

*As of 30 April 2021. Based on the LBMA Gold Price PM in: US dollar (USD), euro (EUR), Japanese yen (JPY), pound sterling (GBP), Canadian dollar (CAD), Swiss franc (CHF), Indian rupee (INR), Chinese yuan (RMB), Turkish lira (TRY), Russian rouble (RUB), South African rand (ZAR), and Australian dollar (AUD).

Source: Bloomberg, ICE Benchmark Administration, World Gold Council

 

 

Chart 6: Year-to-date performance*

Year-to-date performance*

Year-to-date performance*
*To 30 April 2021. Note: Return computations for ‘EM equities’: MSCI Emerging Markets Total Return Gross; ‘Gold (US$/oz)”: LBMA Gold Price PM; ‘US treasuries’: Bloomberg Barclays US Treasury Total Return Unhedged USD; Commodities (GSCI)’: S&P GSCI Total Return; ‘Europe equities’: MSCI Daily Gross TR Europe; ‘US equities’: MSCI Daily Total Return Gross USA;

Sources: Bloomberg, World Gold Council; Disclaimer

*To 30 April 2021. Note: Return computations for ‘EM equities’: MSCI Emerging Markets Total Return Gross; ‘Gold (US$/oz)’: LBMA Gold Price PM; ‘US treasuries’: Bloomberg Barclays US Treasury Total Return Unhedged USD; ‘Commodities (GSCI)’: S&P GSCI Total Return; ‘Europe equities’: MSCI Daily Gross TR Europe; ‘US equities’: MSCI Daily Total Return Gross USA.

 

 

Chart 7: Gold Price and moving averages*

Gold Price and moving averages*

Gold Price and moving averages*
‘US credit’: Bloomberg Barclays US Credit Total Return Value Unhedged; ‘US TIPS’: Bloomberg Barclays US Treasury Inflation Notes Total Return Index Value Unhedged; ‘Euro treasuries’: Bloomberg Barclays EuroAgg Treasury Total Return Index Value Unhedged; ‘Oil(US$/bbl)’: US Crude Oil WTI Cushing OK Spot; ‘REITs’: Dow Jones US Select REIT Total Return. Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*‘US credit’: Bloomberg Barclays US Credit Total Return Value Unhedged; ‘US TIPS’: Bloomberg Barclays US Treasury Inflation Notes Total Return Index Value Unhedged; ‘Euro treasuries’: Bloomberg Barclays EuroAgg Treasury Total Return Index Value Unhedged; ‘Oil(US$/bbl)’: US Crude Oil WTI Cushing OK Spot; ‘REITs’: Dow Jones US Select REIT Total Return. 

 

 

Chart 8: COMEX net long positioning*

COMEX net long positioning*

COMEX net long positioning*
*To 27 April 2021. Note: The Commitment of Traders (COT) report provides information on the positioning of speculative investors in the U.S. futures markets. Short positioning reflects bearish sentiment while long positioning reflects bullish sentiment in the gold futures’ markets. Source: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*To 27 April 2021. Note: The Commitment of Traders (COT) report provides information on the positioning of speculative investors in the US futures markets. Short positioning reflects bearish sentiment while long positioning reflects bullish sentiment in the gold futures markets.

 

 

Chart 9: Gold ETF flows by region*

Gold ETF flows by region*

Gold ETF flows by region*
*To 30 April 2021. Note: ‘Gold (US$/oz)”: LBMA Gold Price PM (end-of-period) On Goldhub, see Global gold-backed ETF holdings and flows Source: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council

Sources: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council; Disclaimer

*To 30 April 2021. Note: ‘Gold (US$/oz)’: LBMA Gold Price PM (end-of-period).

On Goldhub, see Global gold-backed ETF holdings and flows

 

1Based on the LBMA Gold Price PM in USD as of 30 April 2021.

2Comparison made between trading volumes of Au(T+D) at the Shanghai Gold Exchange and the gold future at the Shanghai Futures’ Exchange in April and in March.

3The Commitment of Traders (COT) report provides information on the positioning of speculative investors in the U.S. futures markets. Short positioning reflects bearish sentiment while long positioning reflects bullish sentiment in the gold futures’ markets.

4Based on the LBMA Gold Price PM in USD as of 27 April 2021

5We use the Fed’s balance sheet as a proxy for a more general alternative tools that global central banks have been using in recent years to complement traditional interest-rate driven monetary policy tools.

6The International Labour Day holiday will last five days in 2021, two days longer than in previous years

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