The price of an ounce of gold rose above $1,900, the highest level since early 2021. In May, gold seems to show one of the best returns of popular assets. It is close to 8 percent, and only silver seems to be better with a performance of 9 percent since the beginning of the month.
Thus, gold is making up for the losses that occurred at the turn of last summer and autumn, when we were dealing with a very large buying euphoria. Later, investors seemed disappointed that prices did not continue to grow and started selling, among others, units in ETFs, where, in turn, there was a complete capitulation and record outflows recently. This has removed the supply overhang and may translate into the current price rebound.
Several other factors may also be behind the rise in bullion prices. On the one hand, it is the weakening US dollar, and on the other hand, high inflation in the USA together with the lack of reaction from the Federal Reserve, i.e. monetary policy tightening, which in turn seems to lead to increasingly negative real interest rates overseas. The Fed, like the NBP, is trying to downplay inflation, saying that it is temporary and cannot be fought with interest rate hikes.
This environment seems to favor the gold market, which is trying to return to the upward trend started in 2015. Back then, just over $1,000 was paid per ounce. This past summer, the price was already twice as high. Hence, the assumption that the fall to $1.7 thousand two months ago ended the correction, and currently we are seeing a new impulse in the market, which was previously effectively cleared of impatient investors.
Investors may also be hedging gold against theoretically high valuations on Wall Street. If a deeper correction appeared on the stock market, as the capitalization of all companies in the USA already reaches almost 200% of the country's GDP, gold could still be snatched up by investors.
The aforementioned USD weakness, which could also be favorable for gold priced in the dollar, shows that the dollar index was at 89.7 points on Wednesday, its lowest level since early January, amid global risk appetite and diminishing expectations for an early tapering by the US central bank. Richard Clarida, Fed vice chairman, joined members Lael Brainard, Raphael Bostic and James Bullard, who reiterated their view this week that the recent spike in inflation is temporary and the Fed will remain ultra-accommodative until the economy recovers. Clarida added, however, that the Fed may be ready to begin tapering discussions at upcoming meetings, according to the FOMC minutes released earlier this month. This is another sign that financial policymakers in the US are closer to debating the issue.
PCE inflation, GDP and data on the number of new unemployment claims in the US to be released later in the week will provide an update on the economic recovery and price pressures.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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