Gold Update

April was another good month for Gold, showing 4% gain and at the end of the month at US$2,307/oz. In April, unlike March, Gold finished off its intra-month high from probable buyer reticence and profit-taking, reflected in falling Chinese premia, lower Indian imports, and flat-lining COMEX positioning. On the flipside, the trend in North American gold ETF flows turned positive, albeit slightly, joining strong demand for Asian ETFs.

Existing variables and their longer-term relationships to gold returns have, for the second consecu-tive month, failed to capture price strength in its entirety. Adding a geopolitical risk proxy as well as positioning in the Shanghai futures exchange offers an explanation for some of the moves in March and April, but one other major explanatory factor is that central bank buying was once again a significant contributor to gold returns.

Summarised, Gold hit new all-time highs in April but pulled back by end of the month. Chinese buying and central banks appear major drivers of support.

Looking forward, stagflation risks are on the rise and growth looks fragile while inflation remains problematic. Asian investors may continue to draw attention. A sizable rise in volumes from Shanghai gold futures (SHFE) and other forward contracts have recently attracted attention. While short-term tactical traders may have contributed to the spike in volumes, most SHFE participants are industry users with hedging purposes.
The main question is whether Asian investor appetite for gold will remain well anchored given the macroeconomic dynamics or in a scenario where profit taking becomes more widespread.

Further government spending support and reliant on shaky labour market health is needed, both factors open the door for event risk. Meanwhile, inflation remains sticky and the outlook seems to point once again to “stagflation” which, in turn, is helping the case for gold and could encourage Western investors to join strong demand from central banks and Far East buyers.

The recent Bank of America (BofA) Fund Manager Survey revealed a material shift in economic ex-pectations with the probability of a no-landing scenario for the global economy increasing from 7% to 36%. While a soft landing still gets top billing, this shift suggests market participants are expect-ing growth and inflation to stay strong throughout 2024; reflected in investors drastically slashing their rate cut expectations for both, in the US and Europe.

In recent months inflation and growth have seen several consecutive up-ticks. The original expecta-tion for seven Fed rate cuts during 2024 has now been slashed to one, and even that has been pushed back. And while this has been going on, gold prices have breached all-time highs multiple times.

Gold’s resilience is well noted by now. Central bank demand and investor demand, particu-larly in East Asia, as well as a persistent geopolitical premium have helped gold dismiss the challenges presented by the current investment environment. But even if some of the EM demand that was experienced to date wavers, there is an additional trend that warrants attention, which is stag-flation and it has historically been one of the best environments for gold return.

US GDP and PCE inflation data on 25 April surprised markets. Following consecutive months of strong economic data and middling inflation, these two prints nudged stagflationary with a dra-matic drop in GDP (1.6% vs e2.5%) and an unwelcome rise in core PCE inflation (3.7% vs 3.4%). As seen in March, growth and inflation surprise indices had been flirting with such a dynamic.

While fiscal support is often welcome, it does create concentration and event risk if the underlying economy is not strong and indicators of labour market fragility are plentiful:
a) Household survey has shown no growth for six months,
b) “Jobs plentiful” and “job finding” indicators are slowing as are full-
time jobs vs temporary jobs,
c) Small business hiring plans are very weak,
d) Bankruptcies are shooting up.

For now, consumer spending remains solid, driven it seems by the more well off but for the rest of the economy things are not too bright and this has created fragility. Meanwhile, inflation remains problematic, largely due to the shelter contribution to core inflation. A stagnant housing market is driving demand for rental accommodation; a situation unlikely to be resolved in the short term and one which keeps shelter costs high. There is also an uncomfortable expected pick up in used car prices and insurance costs. In all, inflation looks set to stay well above target and growth hopes are pinned to a fragile economy and labour market. This is likely why US Fed Chairman Powell noted that it is “unlikely that the next policy rate move will be a hike.”

The levels of inflation and growth deceleration we are seeing now are not as precarious as those experienced during the 1970s period of stagflation but we do not need a repeat of those extreme conditions for stocks to be under pressure. Conversely, gold will likely respond positively to the combination of sticky inflation and less-than-stellar growth.

As we move from soft landing to higher-for-longer, and while the Fed is not in any rush to cut rates, the rest of the economic picture may provide more incentives for Western investors to join their Eastern counterparts in adding gold to their investment strategies.