Gold Market

GOLD MARKET

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. A levelling in interest rates on the back of accommodative global monetary policies, combined with rising money supply and further inflationary pressures, may support gold investment demand.

Gold struggled as rates rose and gold price weakness continued in March. By end of March gold was down over 10% y-t-d, its weakest quarterly performance since Q4 2016 and it was similarly weak across major currencies. Nevertheless, gold volatility remained low unlike most risk-on assets, whose volatility tends to increase amid downward price movements and therefore highlights gold as an effective risk management tool.

Rising interest rates also weighed on gold throughout Q1 impacting the opportunity cost of holding gold and while expectations of higher inflation kept building, the continued bond sell-off pushed nominal and real yields on sovereign debt higher in March with the 10-year Treasury yield seeing the sharpest rise in 30 years and the positive impact of rising breakeven rates was outweighed by rising nominal interest rates. Further analysing this, it shows that gold has become more sensitive to interest rates and inflation over the last year.

Investor sentiment towards gold remained bearish with net long positioning falling to its lowest level since 2019 and net outflows from gold ETFs of 107.5 tonnes over the month despite continued inflows from Asia. Central bank demand has remained mixed too, with net sales in January followed by net purchases in February.

Despite, retail demand began to pick up in January in India, gathering momentum in February due to reduction in import duty on gold, the lower gold price and appreciating rupee. Following the 5.6% drop in local gold price and better economic sentiment in February, both jewellery and investment demand witnessed a resurgence. Robust retail demand pushed local market premium to 51 months high in March.

In China, the gold consumption was boosted in January/February by its tradition of hoarding gold products around the Chinse New Year. Also, ETFs attracted local investors’ attention and they grew at end of March by over 5t y-t-d, reaching a new record high of 72.4t. The Chinese gold consumption recovery has led to the spread rising so far.

North American gold ETFs saw heavy outflows in March and US Mint reported strong levels of buying during Q1. Further evidence of significant interest in gold investment at a retail level came from Perth Mint which reported also significantly higher levels of buying and the increase was attributed to greater levels of retail demand from US consumers. In Germany, evidence from local market participants shows that consumer demand was similarly strong in Q1 despite sizable outflows seen in gold ETF space.

At this point, investors are likely to remain focused on rising inflation expectations. While gold’s increased sensitivity to interest rates may be significant headwinds to its performance in short term, the recent sharp increase in interest rates might level off as central banks continue to use monetary policy tools to keep them in check. Some banks increased bond purchases when local yields increased, while signalling a continuation of current asset-purchasing plans and level of target rates. Despite the intense focus on rising yields during the quarter however, the overall level of yields remains low. Consequently, investors continue to shift their asset allocations from traditional high quality, low yielding bonds to assets which offer higher potential returns, but simultaneously higher volatility.

Gold prices have generally been supported by overall increase in negative yielding debt. Additionally, investors may likely face elevated levels of risk, another key driver of gold investment demand, in short to medium terms as markets continue to assess how monetary and fiscal strategies play out and the divergent approaches to control higher yields taken by central banks worldwide are likely to contribute to higher risk as well. Rising inflationary pressures are expected to be supportive for gold over the short to medium term as well and the so-called reflation trade will also lead to uneven performance of equities, with value stocks outperforming growth stocks, causing higher volatility of some risk assets and potential for possible pullbacks.

Historically, gold has underperformed to commodities in the initial stage of reflationary period but has generally tended to catch up and outperform in the longer terms. Gold investment may find further support in its role as portfolio hedge as investors look to guard against these risks mentioned.

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