Gold gets incited over inflation and momentum fears

Gold gets incited over inflation and momentum fears, rising 7% on the month and has recovered its Q1 losses, finishing May virtually flat y-t-d on the back of a significant technical breakout.
Sentiment toward gold continued to improve as net positioning on COMEX futures rose to its highest level since February.

Gold ETFs recorded their first monthly inflows since January and the highest since September while in China, purchases regarding holiday and wedding, supported consumer demand in May and Indian consumer demand was heavily impacted by COVID-related lockdowns.
Furthermore, healthy net purchases by central banks are expected this year supported by purchases from Thailand and Hungary in recent months.

Looking forward, inflation and tightening concerns will be important drivers of gold in the near term, with the upcoming Fed and ECB meetings in the spotlight.
Gold registered healthy positive returns for the second consecutive month, erasing the losses accumulated during Q1. Gold ended May at US$1,899.95/oz, its highest level since January and back above its 200-day moving average, representing a 7.5% m-o-m increase.

Indeed, having shown early signs of improvement during April, sentiment became more bullish in May. Net long positioning in gold futures on COMEX rose to US$44bn, equivalent to 725 tonnes (t), their highest level since February. While net positioning remains some way off previous highs, it is now 48% above its most recent low at the end of March. Additionally, this sentiment was reflected in the technical, particularly as gold broke resistance, moving towards US$1,900/oz. But gold’s relative strength index strayed into overbought territory, suggesting we could see some consolidation in the near term.

Gold ETFs saw their first net monthly inflows since January. Overall holdings in these products rose by US$3.4bn (61.3t. 1.7% AUM) to US$222bn (3,628t). This change in sentiment comes against a backdrop of investor unease over inflation, a weaker US dollar, and lower real yields. In addition, historically we see a one- to two-month lag in some of the larger North American funds and the gold price.

Interest rates, a major driver of gold’s performance so far in 2021, continued to exert some influence on gold in May. Ten-year sovereign bond yields, as well as US ten-year breakeven rates, only moved marginally during the month, reflecting the continued uncertainty over the economic recovery and inflation, although they remain higher year-to- date. The slight decline in yields helped to increase the attractiveness of holding gold, especially considering gold’s heightened sensitivity to rates that we have seen more recently. Moreover, real rates dropped as inflation expectations, as gesticulated by TIPS break evens, increased.

Market volatility spikes were also a notable driver of the gold price. This is perhaps not surprising given that April’s US CPI print jumped to 4.2%, the largest 12-month increase since September 2008 and well above expectations. The jump rattled global markets, due to concerns that monetary and fiscal tightening could occur earlier than anticipated. Elevated volatility in mainstream assets, along with eye-watering swings in cryptocurrencies, boosted some safe-haven flows into gold.

The impact to gold’s performance in May came only from a higher risk appetite through equity and bond flows, and the effect of an elevated benchmark due to positive returns in April.
The gold return was also supported by a further decline in the US dollar, with the trade-weighted US dollar index falling by 1%. By the end of May the US dollar has fallen almost 3% from its year-to-date peak in early March.

China: A holiday-related sales boom provided support for consumer demand during the month. To stimulate domestic consumption China kicked off the 2021 National Consumption Promotion Month on 1st May, the first day of the five-day International Labour Day holiday.
Various reports indicate strong sales of gold jewellery and investment products in many cities, driven primarily by holiday- and wedding-related demand, a decline in the local gold price, and expectations of a further price rise to come. According to JD’s Big-data Research Institute, jewellery ranked fourth among the most popular 2021 Mother’s Day (9 May) gifts, providing additional support for consumer demand.
China imported around 111t of gold in April, 73t higher m-o-m and 106t higher y-o-y, the highest level since January 2020. Rising gold demand and lower local supply has led to a greater need for gold imports. But imports have remained below the 2019 average due to strict COVID 19 related border control measures.

India: Retail demand on Akshaya Tritiya (AT) – the major gold-buying festival, which fell on 14 May this year, was muted as many jewellery stores were closed due to COVID. Sales found marginal support through retailers’ digital/omni-channel strategies, while demand for digital gold remained strong.
Consumer demand was severely hampered throughout the month, as several states were under lockdown in response to the recent surge in COVID cases. This was clearly seen in official gold import figures, which fell to 11.4t in May. But there are signs that daily cases are beginning to decline and if this downward trend continues, lockdowns will likely ease and non-essential businesses re-open, providing a boost to gold demand.

Other markets: The Central Bank of Thailand bought 43.5t (US$2.5bn) of gold in April, increasing its reserves to 198t (US$11.2bn) and lifting gold’s share of total reserves to 4.5%. This chunky addition follows the 63t purchase by Hungary in March. Despite a more inconsistent picture for central bank demand over recent months , this supports the view that central banks will remain overall net purchasers in 2021.

Gold ETFs added US$3.4bn (61.3t) to global assets under management (AUM) in May, reversing three straight months of outflows. Global AUM stood at US$222bn (3,628t) at the end of the month, only 9% shy of the August 2020 high of US$240bn and 7% the October 2020 tonnage high of 3,908t. These inflows were largely a function of investment demand increasing with the strengthening gold price, renewed inflation concerns, a weaker US dollar and lower real yields.

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