Gold Market Commentary

May highlights

• Strong bi-directional equity volatility failed to support gold prices as short-term momentum waned
• Outflows of global gold ETFs totalled 53t (US$3.1bn) in May, losing 1.3% of assets; in contrast, US Mint coin sales rebounded and remain strong y-t-d.

Looking forward

• Gold price seasonality has shifted in recent years suggesting the historically strong late summer rally may come sooner than normal
• The ten worst quarters of equity performance have been met with positive gold returns in all but one instance. Current Q2 performance would rank in the bottom 20, yet gold is lower.

Momentum drove gold price weakness

Gold fell 3.8% in May, leaving it just under 2% higher on the year at US$1,839/oz.¹ Gold’s pullback was largely driven by (Chart 1):

• weaker momentum via ETF outflows and the lowest level in net long positioning on COMEX futures in a year, as the market suffered from absent buyers and an antipathy towards bonds…even though inflation may be peaking 
• lower risk and uncertainty as implied 10-year expected inflation break-even rates fell and equities rallied into month-end.

Although multiple drivers weighed on the gold price, it was more resilient than the -7.5% return suggested by our Gold Return Attribution Model (GRAM). Equity market volatility hit the highest levels since the start of COVID, with most equity markets in ‘a pullback’ or ‘bear market territory’.² Bond yields and the US dollar fell during the month – both of which are generally positive for gold. 

We attribute the 3.7% unexplained portion of gold’s return to a continued geopolitical risk premium – not captured by either oil or implied volatility in our model – as well as a lower sensitivity to real interest rates and the US dollar.

Looking ahead…

Notable market participants have joined the chorus of investors who feel that central bank actions might be too little too late. Jamie Dimon explained the Federal Reserve (Fed) ‘should have moved quicker to raise rates’, and Bill Ackman highlighted that ‘the only way to stop today’s raging inflation is with aggressive monetary tightening or with a collapse in the economy’. The Fed minutes showed minimal change on its part, with 50bps hikes expected at each meeting this year. But recent weak economic data may have made investors hopeful that the Fed may not raise as much as expected, and this could have been a driver of the equity market bounce. Ultimately, central bank language and behaviour in the coming months will likely be a strong determinant of market action.

Seasonality has shifted slightly in recent years

While our research shows the relevance of gold as a long-term strategic asset, investors often take advantage of tactical opportunities or shifting macroeconomic conditions to review their gold allocations. 

Seasonally, January is a strong performing month for gold over multiple time periods and particularly since 2000. Portfolio inflows and rebalancing, combined with the effect of Chinese New Year, could be drivers. 

Until 2000, September was the strongest performing month of the year, linked to investors preparing for year-end as well as positioning ahead India’s buying season (Chart 3a).³

However, since 2000 this seasonal effect has shifted forward. Aside from January, August has now become the only other month with a positive return at both the bottom and top of the 90% confidence band for the past 20 years (Chart 3b).

History would suggest gold could finish the second quarter stronger

The equities markets have pulled back significantly this year, with most major indices more than 10% lower y-t-d.⁴ Equity volatility remains at multi-year highs, but gold volatility is subdued (Chart 4). While gold is useful as a tail hedge, it also works well during sustained stock market pullbacks. We list below the ten worst quarterly returns by the S&P 500 and how gold fared during those quarters (Table 1). Gold had positive returns in nine out of the ten, averaging 5.4%, while the S&P 500 averaged -20.7% during those periods. 

The current S&P 500 performance to this point would leave it in the top 20 worst, historically. Yet gold has fallen 5% this quarter.

Although current market conditions are unlike anything we’ve seen historically, continued equity weakness could very well spark a rally in the gold price.

While some may worry that gold might struggle if equity markets rally, gold’s recent performance is also a by-product of liquidity sourcing for beaten-up areas of the market. In fact, in the few instances of stock market rallies over recent weeks, gold has also rallied most of the time. Additionally, we have found that, historically, gold maintains positive performance in most longer-term stock rallies. For example, in the subsequent quarter to the 10 worst S&P 500 quarterly performances discussed above, on average equities rallied by 8.7% while gold rose by 2.5% over the same period (Table 2).

Table 1: Worst quarterly returns of the S&P 500 versus gold returns

Quarterly returns of the S&P 500 since 1971 versus the performance of gold during pullback periods*

Regional insights

China: COVID-related restrictions in key Chinese regions remained in May – although they were gradually easing in some areas. And these restrictions continued to weigh on local gold demand: the average trading volumes of Au9999 – a proxy of Chinese wholesale gold demand – witnessed the weakest May since 2013. But the local gold price spread has been improving during the month as COVID cases fell and stimulus measures rolled out.⁵

India: Retail demand remained strong during the first three weeks of May due to robust Akshaya Tritiya sales, wedding demand and a lower base y-o-y. Retail demand, however, became soft during the last week of the month due to a higher gold price and fewer auspicious marriage dates. With improved demand, premia in the local market surged to US$4-5/oz by the third week of the month compared to a discount of US$7-10/oz at the end of April. Softness in retail demand and liquidation of bullion stocks by trade pushed the local market to a discount of US$3-4/oz by the end of May.

Europe: Inflation continued to surge across the eurozone: consumer prices set a new record in May, jumping 8.1% y-o-y. Not only does this add to pressure on the ECB to confirm the path for rates at its forthcoming meeting, but it also underscores divisions in the ECB governing council as to the appropriate pace of hikes. Whatever the immediate outcome, eurozone rates are set to return to at least zero by the autumn, with potential for them to clamber out of negative territory before year-end.

US: Data from the US Mint shows that gold coin sales (American Eagle and Buffalo) totalled US$365mn (199,000 oz) in May. Sales rebounded from the April 2022 lows to slightly higher than the y-t-d average of 178,000t, and are on pace to have the strongest year (1.58mn oz, US$3tn) in terms of US coin sales since 1999, when sales were 2.1mn oz, albeit at a much lower dollar value of US$576bn (Chart 5).⁶

ETFs: Gold ETF net outflows totalled 53t in May, with y-t-d inflows of 262t (US$16.4bn)(Table 3).⁷ All regions experienced outflows during the month. North American funds led the way with 34t of outflows, followed by European funds (17t). Weaker momentum and positioning likely drove these outflows. Total AUM in these products now stands at 3,823t (US$226bn), just 2.5% below the record tonnage level of 3,922t achieved in November 2020.⁸

Table 3: May 2022 Global ETF flows

*Data to 31 May 2022. On Goldhub, see: Gold-backed ETF flows.
Source: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council

Footnotes

¹As of 31 May 2022, based on the LBMA Gold Price PM.

²Based on the 30-day realised volatility of the S&P 500 Index, which increased to 33 as of 31 May 2022.

³Based on the LBMA Gold Price PM 1971 – 2001.

⁴As of 30 May 2022. Based on MSCI US, EAFE and EM total return indices..

⁵For more information, please visit: China unveils detailed stimulus policies to support virus-hit economy | Financial Post.

⁶Based on annualising. Current levels (12/5) * current amounts.

⁷We regularly review the global gold-backed ETF universe and adjust the list of funds and holdings based on newly available data and information.

⁸All value figures based on the LBMA Gold Price PM as of 31 May 2022.