Gold: Fire doused, smoke remains!
Recently the World Gold Council (WGC) published their Gold Market Commentary and said, Fire doused, smoke remains! Further the report said, a small drop and an invisible hand; Gold fell 0.9% in May to US$1,964, leaving the y-t-d return at 8.3%. But the fall was marginal and in part attributable to strength in North American currencies (USD, CAD). In other currencies gold made gains.
Our gold model GRAM points to a drag from all identified drivers of gold during May, led by a rise in opportunity cost, a fall in risk and a drag from momentum factors. However, gold was almost 3.5% better off than these drivers suggested it should have been.
The unexplained portion – or residual of GRAM – is statistically stable over time, but has been more positive than negative over the past 12 months. We have addressed this phenomenon previously and posit three explanations: an omitted variable, a temporary shift in gold’s sensitivity to one or more of these factors, or noise.
Candidates for omitted variables are central bank buying or a geopolitical risk premium. Alternatively, if we estimate the model over the most recent three years rather than the full fifteen, the implied impact of interest rates falls substantially in favour of a rise in the impact of FX.
As we discuss in our forward-looking section, it’s possible that a portion of our model’s unexplained factor is a shift in focus by investors from 10-year Treasuries to 2-year Treasuries as well as a greater focus on US dollar moves.
In May, global gold ETFs added 19t to holdings for the third month in a row, but were offset by a fall of 79t in Managed Money net long futures positions on COMEX.
In their considerations for June, the WGC suggest, 1: Recent strong data has led to a slightly higher than expected Fed terminal rate and fewer cuts in 2023 – a near-term gold headwind; but more visibility on where rates might peak could re-establish gold’s link to longer maturity yields – a medium-term gold tailwind.
2: A debt ceiling deal might be seen as a negative for gold, having averted a potential default. But in 2011 it proved the opposite, at least in the near term. Given such high stakes, partisan wrangling until 2024 elections should offer more support for gold.
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