Gold rally takes a breather in April: WGC

May 11, 2023

In the recently published, Gold Market Commentary, World Gold Council (WGC) said, Gold rally takes a breather in April! In a review they said, Gold in US$/oz returned just 0.1% in April, consolidating after a strong run up during Q1. Support for gold came from lower rates and positive ETF flows while lower inflation expectations and profit taking created a drag.

In a looking forward view, the WGC suggested that,

1: The strong run-up y-t-d has left gold in need of a catalyst to break beyond its all-time high: one likely contender is a sharp equity correction, as valuations remain lofty in the face of deteriorating fundamentals.

2: Gold’s performance during sharp equity corrections has almost always been positive but has varied quite a bit in magnitude; prior gold returns and the level of real interest rates are key factors &

3: At current levels these two factors suggest gold’s response to a sharp equity sell off could sit in the upper end of the historical range.

In a row, Gold price touching the sky, Prithviraj Kothari, MD CEO of RiddiSiddhi Bullions Limited (RSBL) said: “Gold prices have been on an unstoppable run, skyrocketing from the $1800 (Rs 55000) level at the beginning of March to above $250/oz (Rs 61800) – notching up a spectacular gain of over 12%, in the last 2 months.

There are basically three factors that are pushing the gold prices higher: Banking Crisis, Recession concerns and De-dollarization concerns that have emerged with the cracks in the banking system in March. These concerns have resulted in a capital flight from equities to gold. I expect gold prices to rise 15-20% above current levels by the end of the year.”

In the Summary, the WGC report said, as equity indices grind higher, risk-on sentiment remains. Both tight credit spreads and low implied volatility measures reflect this. Gold is tiptoeing around all-time highs but may need a catalyst to break beyond current levels. The anticipated ‘25bps and pause’ FOMC policy statement proved not to be a catalyst while strong employment data on 5 April undermined near-term policy support.

An equity sell off, however, could be that catalyst. Excess savings, accumulated through lower spending and large fiscal transfers since 2020, look to be dwindling. While these savings have been a possible driver of both high inflation and strong margins for equities, their potential depletion could also be equities’ undoing.

Should that transpire, gold has a history of responding well to sharp equity sell offs. But the extent of that response varies. We find that alongside a decent fall in real yields and the US dollar, the prior level of real yields and gold’s performance leading up to the equity sell off also have some sway. As it currently stands, these two factors historically point to a good rather than poor response to an equity sell off.

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