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 (Chart 10).⁴ 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 technicals, 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) (Table 1). 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.

Looking at the short-term model more closely (Chart 1) our analysis shows all but two of the underlying variables we use made a positive contribution to gold’s performance – the first time this has happened since June 2011. Of these, the positive inflows in gold ETFs, stemming three consecutive months of outflows, were the biggest single contributor to the month’s gold price rally (Chart 11). 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.

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 signalled by TIPS breakevens, 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. In Europe, the debate on inflation and tapering rages on as eurozone inflation rose to 2% in May, past the ECB’s “below but close to 2%” target (Chart 2). 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.

Looking ahead: the policy tightening conundrum

Fears over inflation, and whether it will be transitory or not, continue to cast a dark cloud over markets and should be supportive for gold in the short term. And expectations regarding monetary policy are key. Markets are closely monitoring economic growth metrics, as well as central bank statements, searching for clues as to the likely timing of the tapering of asset purchases. For now, it seems that accommodative policies will remain in place, creating support for gold investment. In particular, gold investors will likely be watching statements coming out of the Fed’s mid-June meeting, as well as those from the ECB and other major central banks.⁵ Positioning in the options market indicates that some investors may be preparing for a possible change to monetary policy: the put/call option skew – which signals the price of put options on gold futures relative to calls – remains above historical levels and this could signal either downside potential remains or that the recent rally could continue.

Gold’s direction is likely to continue to be driven by two competing forces. On one hand, accommodative monetary policy will keep the opportunity cost of holding gold low. And should higher levels of inflation become entrenched, gold’s appeal as a hedge against a reduction in purchasing power would likely be enhanced. On the other hand, higher inflation would ultimately lead to tightening monetary policy, lowering gold’s appeal when compared to other, yield-bearing assets. The key will be whether inflation is just a transitory effect or whether global fiscal stimuli and ballooning deficits result in more structural inflation, for which investors may not be fully prepared. Net long positioning on COMEX and gold ETF flows will continue to be useful metrics in gauging sentiment, particularly in relation to inflation and potential tapering.

Regional insights

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 1 May, the first day of the five-day International Labour Day holiday. In Shanghai, for instance, sales reached RMB19.65bn, 30.4% higher y-o-y and 9.6% higher than 2019.⁶ 

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.⁷

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 (Chart 3). As we mentioned in our April commentary, 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 (Chart 4), this supports our view that central banks will remain overall net purchasers in 2021, albeit at more modest levels than 2018 and 2019. See our monthly central bank statistics and April blog on Goldhub.

ETF Commentary: Gold ETFs added US$3.4bn (61.3t) to global assets under management (AUM) in May, reversing three straight months of outflows (Table 1). 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. We believe 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. Read our full May gold ETF flow commentary on Goldhub.

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

Most asked investor questions

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

Why choose gold when inflation-linked assets exist?

Inflation-linked assets, such as Treasury Inflation-Protected Securities (TIPS), are a popular means for investors to protect themselves against inflation. For this reason, some may wonder why there would be a need for an allocation to gold despite it being a proven long-term hedge against inflation.

While inflation-linked assets are indexed to CPI, which measure the price of goods and services, this may be too narrow to measure true inflation. Considering a broader metric, such as money supply, we see two key reasons why gold can play an important role for investors (Chart 5). Gold is a truly global asset and a hedge not just against the price of goods and services, but also against the erosion of purchasing power in general. It is also a hedge against the debasement of a currency should the value of that currency be slowly eaten away as supply is increased. This is something more direct CPI hedges, such as TIPS, cannot necessarily match.

How should we think of gold in relation to the possible commodity supercycle?

Questions are swirling on whether commodities prices – which have soared in response to an improving economic outlook – are entering a new supercycle. As a result, some investors are looking to increase their exposure to commodities.

Gold is often lumped into a broad commodities definition, but this overlooks the physical attributes and functional characteristics that set it apart. Gold’s diverse sources of demand and supply mean it is less exposed to the business cycle, less volatile, and more robust during times of financial stress than the broader commodities complex. And our analysis has shown that the effects of gold on a diversified portfolio cannot be attained by an allocation to a commodity basket alone.

While gold may benefit from some of the same drivers that are propelling commodities higher over the longer term, we believe there is a strong case for gold to be part of a strategic allocation in portfolios.

Can gold benefit from weaker fixed income performance?

Despite rising yields grabbing most of the headlines so far this year, interest rates remain structurally low. Thanks to a prolonged period of easy monetary policy, expected bond returns have fallen, weighing on overall portfolio performance. This has prompted some investors to hunt for yield by moving further down the credit quality curve, or into alternative assets such as real estate, hedge funds and private equity.

While these asset classes have the potential for higher returns, historically they are more volatile. Despite not necessarily being the best volatility diversifier, our analysis has shown that increased allocations to gold act as a ballast by improving risk-adjusted returns in the face of lower future expected bond returns and higher portfolio volatility (Chart 7).

Gold market monitor

Table 2: Gold return in key currencies*