Investment Insights

Inflation fears and momentum ignite gold

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.

The volatility of numerous assets has shifted along with the performance of gold, which has recently rebounded to nearly flat on the year. 

Inflation, falling yields and the US dollar pushed gold higher

Marking a turnaround from the first three months of the year, gold rebounded 4.5% in April to finish the month at US$1,768/oz - its highest monthly closing level since January and its first positive monthly return since December 2020.

After a strong 2020 performance where the price rallied 25% in US dollar terms in an environment where rates fell, gold has been much weaker during 2021, down 5% year-to-date with rising rates.

Inflation has emerged as a primary concern for investors. On balance, arguments for ‘uncomfortably high’ US inflation seem to outnumber those against, at least in the near term.

A sharp rise in US interest rates and a stronger dollar have weighed on gold recently. But a rebound in economic activity and a lower gold price have provided opportunities for consumers and strategic investors alike.

How gold’s role in a portfolio differs from cryptos

The COVID-19 pandemic raised uncertainty by both compounding existing risks while creating new ones. But by the end of last year, investors were optimistic that the worst was over. 

Gold-backed exchange-traded funds and similar products (gold ETFs) have flourished since their introduction in 2003, attracting both institutional and retail investors across the globe. Recently, gold has become globally accepted as a strategic asset amidst a high-risk and low-rate environment spurring investment demand and the expansion of the gold-ETF market.

Gold has been on a generally positive trend for the past few years. However, the onset of the global COVID-19 pandemic has made gold’s relevance as a hedge even more apparent and accelerated its price performance. Gold increased by 17% during the first half of 2020, moving up by an additional 10% in July.