Gold Market Commentary: As the buck stops, more bite for gold

Looking ahead

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 recently, looking remarkably strong as US growth remained robust and the macro market narrative shifted from ‘when’ to ‘whether’ the Fed will ease this year (Chart 2).

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 (Chart 3). 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.

First, as we discussed in last month’s Gold Market Commentary, a ‘no landing’ scenario has been on the rise. To that end, as expectations reset higher, it will become progressively more challenging for the economy to deliver the upside surprises needed to extend the rise in US yields and the dollar. Second, and according to the BofA Global Fund Manager Survey, a soft landing continues to be the prevailing scenario among investors at this juncture, especially after the recent softer data (for instance, initial unemployment claims and ISM services PMI). As a result, we expect the US dollar to grow increasingly sensitive to weaker US data particularly as it remains close to the top end of its 52-week range (Chart 4).

In addition, the ongoing improvement in global growth outside of the US could temper dollar performance as the currency tends to appreciate during times of risk and vice versa. For example, recent data showed that the eurozone grew by 0.3% in the first quarter of this year following five quarters of stagnant or negative growth. More globally, fears of a recession have also receded.

Finally, looking at the dollar (measured by the DXY Index) through a technical lens shows it has been in a short-term uptrend within a broader sideways range since 2022. Crucially, this recent uptrend is now showing signs of weakening and potentially reversing. The spotlight is now on key support levels including its 200-day average and up trendline from December 2023 (Chart 5).

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.

Historical implications for gold

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 duration of these pullbacks was roughly 22 months, during which the US dollar fell 23% and gold rallied 52%, on average (Chart 6).

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. 

In summary

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. And as highlighted in our analysis, any prolonged weakness in the dollar should, at a minimum, ease headwinds and provide potential upside for gold over the ensuing months.