In May, gold hit new all-time highs at around $2,445 an ounce, up about 20% since the start of the year, meaning gold’s performance has eclipsed most major indexes equity. There was no obvious catalyst for May’s rally. We note that US 10-year TIPS yields fell about 5 basis points to levels around 2.10%, an insignificant move. The US dollar index has weakened only modestly over this period. Geopolitical risks did not worsen significantly over the month, even as the Biden administration imposed additional tariffs on Chinese products.
The positioning data illustrates some nuances that may explain the rally. Data on COMEX and CFTC futures show that investors have held their positions largely unchanged in recent weeks. However, futures data in China indicates a huge increase in long positions. This increase in financial positioning on gold is accompanied by strong demand for the yellow metal from Chinese consumers. The increase in Chinese demand is due to two main factors.
First, gold offers an investment alternative in the moribund local real estate market. Secondly, gold offers a good hedge on the yuan, which has weakened slightly against the US dollar since the beginning of the year. We believe that Chinese demand for physical and financial gold will be a game changer for the yellow metal market and its impact is already being felt. In a sense, gold’s center of gravity is shifting eastward.
The sharp increase in Chinese demand for physical and financial gold adds to the robust demand for physical gold from central banks, which have continued to accumulate large quantities. This has underpinned the rally since 2022. The current accumulation rate is consistent with an annual increase of around 900 tonnes, still well above pre-pandemic levels. We believe that gold will be the main beneficiary of the reserve diversification efforts of the central banks of emerging countries
As the summer months arrive, we expect the world’s major central banks to move closer to cutting interest rates. The Swiss National Bank (SNB) and the European Central Bank (ECB) have already started cutting it and are likely to be followed by the Bank of England (BoE). The Federal Reserve will likely cut rates once later this year, meaning global rate levels will start to fall. This is fundamentally favorable for gold.
Any move to reduce the pace of quantitative tightening by major central banks is also constructive, and we note that the Federal Reserve has already reduced the pace of its QT program, likely to ensure stable financial conditions for large-scale bond issuance. US Treasury debt during the year. In conclusion, the outlook for gold is constructive, although most of the year’s gains have probably already been realized.
