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WGC Gold Market Commentary May 2024 As the buck stops, more bite for gold

Gold return slows in May 2024

Gold posted a third consecutive monthly gain in May, rising by 2% m/m to  US$2,348/oz. Despite the more moderate gain compared to March and April,  gold hit a new all-time high of US$2,427/oz mid-month before pulling back – likely reflecting some profit taking. But market activity remained supportive during the month, with net long managed money positions on COMEX hitting a  four-year high and gold ETFs seeing net inflows (US$529mn) for the first time  since May 2023. 

Looking at our Gold Return Attribution Model (GRAM), there was no single variable that stood out as a key driver in May. Momentum and a weaker US dollar were positive drivers but their impact was marginal. And while the unexplained component of the model shrank considerably in May, it was still the largest factor by far. As we have noted previously, we believe some of this can be attributed to strong over-the-counter buying, including central bank purchases which have been a notable contributor to recent gold returns. 


Looking ahead 

US growth and inflation data continue to set the tone for  currency markets, as well as most other asset classes. In fact,  the dollar was, until recently, looking remarkably strong as  US growth remained robust and the macro market narrative  shifted from ‘when’ to ‘whether’ the Fed will ease this year 

The US dollar rally, however, went into reverse in May – falling for the first time in 2024 – as inflation eased, giving  the Fed more room to cut interest rates. And as we  look forward, the dollar bull narrative could be running short  of arguments for the next leg higher, which, in turn, could be  positive for gold. 

First, as we discussed in last month’s Gold Market Commentary, a ‘no landing’ scenario has been on the rise. To  that end, as expectations reset higher, it will become  progressively more challenging for the economy to deliver  the upside surprises needed to extend the rise in US yields  and the dollar. Second, and according to the BofA Global  Fund Manager Survey, a soft landing continues to be the  prevailing scenario among investors at this juncture,  especially after the recent softer data (for instance, initial unemployment claims and ISM services PMI). As a result, we expect the US dollar to grow increasingly sensitive to weaker World Gold Council 

Historical implications for gold 

The period following a dollar peak has historically been good  for gold. We assessed eight periods in history where the  dollar experienced a prolonged contraction. The average  duration of these pullbacks was roughly 22 months, during  which the US dollar fell 23% and gold rallied 52%, on average (Chart 6). 

Taking a deeper dive, when the dollar has fallen by at least  10% over a six-month period since 1971, the average return  for gold during these periods was +14%. Additionally, gold  returns were positive 87% of the time. 

In summary 

It appears the US dollar is in a protracted range-trading  environment but having performed well recently it could be  due for a further pullback following its first down month of  2024 in May. And as highlighted in our analysis, any  prolonged weakness in the dollar should, at a minimum,  ease headwinds and provide potential upside for gold over  the ensuing months.  

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