Gold is one of the most watched asset classes this year. In the past year, the price of gold once soared from around US$1,600 to over US$2,000 per ounce, and broke through the record high of US$2,085 in early May. However, with the rebound of the US dollar index recently, the price of gold has continued to correct. Over $100, it fell below $1960.
Is this a short-term pullback, or a trend reversal? How will the global central bank’s gold purchase behavior, consumers’ gold jewelry purchase momentum, and gold ETF investment affect the gold price?
Profit-taking after skyrocketing
As of last Friday (May 19), the U.S. dollar index rose for three consecutive days and passed the 103 mark. Traders generally expect the next target to be the March high of 105.88 this year. The number of Americans filing for unemployment benefits fell to 242,000 last week, the biggest drop since 2021. This better-than-expected data slightly raised the probability of the Fed raising interest rates in June. Open to future rate hikes. The previous consensus forecast was for a pause in rate hikes in June.
Due to the strong negative correlation between the US dollar and gold, the recent strengthening of the US dollar has undoubtedly hit gold prices. In addition, positive signs of debt ceiling negotiations and rising expectations of a soft landing for the US economy are all impacting gold prices in the short term.
“Since the fourth quarter of last year, as inflation in the United States and Europe began to cool, interest rate hike expectations have declined. The U.S. dollar index has fallen by more than 10% from a high around 115, and the weakening of the U.S. dollar has allowed gold to gain room for performance. The time correlation is -94%.” Michael Boutros, a senior analyst at GAIN Capital Group, told reporters that now also because of the strengthening of the US dollar, gold has been negatively impacted. Under the suppression of the strong US dollar, the price of gold once fell below $1,960 per ounce.
Before May, due to the market’s excessive expectations of the Fed’s interest rate cut, the dollar was oversold and the price of gold was oversold. On May 4, the price of gold broke through the record high of US$2,080 per ounce in one fell swoop, but the overcrowded position also means that there may be subsequent selling pressure. US CPI data released on May 10 came in slightly below expectations (4.9% y/y vs. 5.0% expected) and the core data came in line with expectations (5.5% y/y) which led to some surprising selling pressure on the USD that day, though the greenback has since regained ground .
“GOLD/USD is currently down more than 6% from monthly and yearly highs. It has broken below the target price, which is the low of the May opening range, and puts near-term risks to the downside in the next few days. In other words, the price is moving towards some Important levels are moving closer together, and the bear front has been drawn,” said Michael Boutros.
For now, the movement of the U.S. dollar will dominate the movement of gold, and the U.S. dollar index may remain strong for a while. A trader at a foreign bank told reporters: “Currently, US inflation is lower, expectations for a pause in interest rate hikes are rising, unemployment is low, and the banking crisis is basically resolved, which strengthens the expectation of a soft landing for the economy. But at the same time, US interest rates are still high Inflation also makes it difficult for the Fed to really cut interest rates, and the dollar is technically necessary to rebound.”
Traders expect the dollar index could hit above 105. Zhu Yanhua, an international business expert at a major state-owned bank, also told reporters that from the technical perspective of the U.S. dollar index, 102.7 and 104.9 are sub-level resistance levels, while the previous high of 105.8 in the U.S. dollar index is the subsequent major resistance level.
Under short-term pressure, gold’s short-term upside attempts seem to have ended in failure. Michael Boutros told reporters: “Gold’s last attempt to break through the opening price of this month failed in the near future. Last week, it fell back below the monthly opening support level ($1995 per ounce), which contributed to the decline we expected.” The first support level of gold is around $1,950/oz, and then $1,918/oz. If it falls below this range, the price of gold may further test $1,877/oz, and a more substantial correction may occur.
However, after the second and third quarters, the dollar may weaken, “because the euro and the pound may rebound, the Bank of England and the European Central Bank are expected to continue to raise interest rates more than the Fed, and inflation in the UK and the EU is still approaching double digits.” Said the above foreign exchange trader.
In May, both the European Central Bank and the Bank of England indicated that they would continue to raise interest rates in the future. Among them, the Bank of England announced its interest rate decision on May 11, raising interest rates 12 times in a row. The country’s inflation rate has reached double digits for seven consecutive months. Only once in nine months has it been below 10%, but that was in August last year, and it was also as high as 9.9%. People from all walks of life generally believe that this rate hike should not be the last action of the Bank of England.
The “Long Story” is still intact
In the medium and long term, the “long-term story” of gold is still intact, that is, the trend of increasing gold holdings by large institutions such as global central banks continues.
“Godfather of Emerging Markets” Mark Mobius recently told China Business News that the trend of “de-dollarization” is not exaggerated. The diversification of allocation behavior, the United States should correct this operation.”
“The dollar remains under pressure given expectations that the Fed could cut interest rates sharply by the end of 2023, driving gold prices higher. On May 4, gold prices rose to $2,062 an ounce intraday, triggering some profit-taking, but with the dollar likely to weaken further, The market is preparing for significantly higher gold prices.” Gary Dugan, chief investment officer of Dalma Capital Management, an investment institution in the Middle East, told reporters. He also mentioned that “stock god” Buffett had previously stated that the period of “incredible” growth experienced by the United States may have passed. “This is another voice that indicates that the best period for investing in US assets and the dollar has passed.”
China Business News previously reported that the World Gold Council’s latest “Global Gold Demand Trend Report” shows that the gold purchases of central banks in many countries have boosted gold demand. The official global gold reserves in the first quarter increased by 228 tons, a record high. . It is worth mentioning that the central bank’s gold reserves have increased for six consecutive months.
On May 7, statistics from the State Administration of Foreign Exchange showed that as of the end of April 2023, China’s central bank’s gold reserves were 66.76 million ounces, compared with 66.5 million ounces at the end of March, an increase of 260,000 ounces from the previous month.
Louise Street, senior market analyst at the World Gold Council, told reporters: “As some economies teeter on the brink of recession, gold as a long-term strategic asset may become the focus. Looking back at history, in the past seven recessions, gold investment There were five positive returns.” In the first quarter of this year, European and American banking risks dominated the market. The continued large-scale official gold purchases at a critical time of heightened market volatility and risk underscore the role of gold in international reserve portfolios.
“The central banks of some developed countries have begun to join the ranks of increasing reserves. Among them, the central bank of Singapore has increased reserves by 68 tons; followed by the central bank of China, which has increased reserves by 58 tons; ECB, then the Czech Republic, the Philippines,” the agency said.
In contrast, the global consumer demand for gold jewelry in the first quarter was relatively flat, at 478 tons. However, China’s consumer demand for gold jewelry rebounded in the first quarter, reaching 198 tons.
“The performance of China’s gold jewelry demand offset the impact of weak demand in India. In the first quarter, India’s consumption was 78 tons, a year-on-year decrease of 17%. The sharp rise in India’s domestic gold price has become the main factor affecting consumption.” The World Gold Council stated that China’s Jewelry demand was the highest quarterly since 2015. Bar and coin demand also picked up significantly in the first quarter. Improved economic growth, coupled with a notable rise in gold prices, has spurred investors’ interest in physical gold. In the future, seasonal factors, rising RMB gold prices and consumer travel spending may lead to a decline in demand for gold jewelry in the second quarter. However, continued economic recovery and previously pent-up wedding jewelery demand are likely to provide a boost to gold jewelery demand.
