Gold-May 2024

Gold posted a third consecutive monthly gain in May, rising by 2% m/m to US$2,348/oz. De-spite the more moderate gain compared to March and April, gold hit a new all-time high of US$2,427/oz mid-month before pulling back, likely reflecting some profit taking. But market activity remained supportive during the month, with net long managed money positions on COMEX hitting a four-year high and gold ETFs seeing net inflows (US$529mn) for the first time since May 2023.

Momentum and a weaker US dollar were positive drivers but their impact was marginal. And while the unexplained component of the model shrank considerably in May, it was still the largest factor by far. As we have noted previously, we believe some of this can be at-tributed to strong over-the-counter buying, including central bank purchases which have been a notable contributor to recent gold returns.

Gold rose for the third consecutive month in May albeit modestly, with COMEX net posi-tioning hitting a four-year high and global gold ETFs seeing the first monthly net inflow for a year. The US dollar bull narrative could be running short of arguments, and a dollar peak has historically been good for gold. US growth and inflation data continue to set the tone for currency markets, as well as most other asset classes. In fact, the dollar was, until recent-ly, looking remarkably strong as US growth remained robust and the macro market narra-tive shifted from ‘when’ to ‘whether’ the Fed will ease this year.

The US dollar rally, however, went into reverse in May, falling for the first time in 2024, as inflation eased, giving the Fed more room to cut interest rates. And as we look forward, the dollar bull narrative could be running short of arguments for the next leg higher, which, in turn, could be positive for gold. And while gold has largely brushed off the stronger dollar recently as Eastern buyers have shifted their behaviour (buyers in emerging markets appear to be less attentive to the US dollar or Western monetary policy expectations), a weaker dollar going forward could bring back Western investors who are waiting for a trigger.

The period following a dollar peak has historically been good for gold. We assessed eight periods in history where the dollar experienced a prolonged contraction. The average dura-tion of these pullbacks was roughly 22 months, during which the US dollar fell 23% and gold rallied 52%, on average.

Taking a deeper dive, when the dollar has fallen by at least 10% over a six-month period since 1971, the average return for gold during these periods was +14%. Additionally, gold returns were positive 87% of the time.

It appears the US dollar is in a protracted range-trading environment but having performed well recently it could be due for a further pullback following its first down month of 2024 in May. Any prolonged weakness in the dollar should, at a minimum, ease headwinds and provide potential upside for gold over the ensuing months.