Monthly Gold Update - May 2023

Gold: Spotlight on May’s performance
The gold price fell 1.3% to end the month at $1,963 despite reaching its highest level since March of last year. Gold has been supported through the month by concerns over the US debt ceiling and projections of a US recession. Increasing confidence that a solution would be found to the US fiscal impasse and the anticipated Fed pivot moved more to a Fed pause; gold fell from its near-term peak.
Source: Bloomberg, to 31 May 2023. Past performance does not predict future returns.
Gold rapidly increased above the $2,000 mark at the start of May and remained there for the first two weeks of the month, breaking above $2,051 at its peak, behind the $2,070 reached last year when Russia invaded Ukraine. This is of interest for technicians as including the record set in August 2020, gold has formed a triple top, which can be taken as a classic signal for a substantial correction. This is of greater note considering the premium gold is trading at compared to traditional models due to specific factors including: speculation of US debt default, bank failures and record central bank purchases.
Year-to-date gold has increased 7.6%.
Keep an eye on… a fading of idiosyncratic factors.
Source: Bloomberg, to 31 May 2023. Past performance does not predict future returns.
Higher real yields were one of the key reasons for the fall in the gold price over the month; real yields increased to 1.48% from 1.22% as gold fell to $1,963 from $1,990. Non-farm payrolls showed both a higher number of job creations and wage inflation as more of the US population (re)joined the workforce. Over the course of the month, markets have projected the Fed will execute one further rate rise and pushed back expectations for any rate cuts into the last quarter of 2023. This was as US inflation fell in line with expectations and is now at 4.9% with the May print currently forecast closer to 4.0%.
Looking forward, the possibility of a US recession would weigh on real rates with a deterioration being a positive for gold. Although the bond market is increasingly signalling the likelihood of a US recession, not all market signs agree – silver is pointing to economic resilience for example. The Fed is known to be particularly sensitive to the labour market and disaggregating the data shows there is not a uniform picture across the States. New Jersey joined California in April as examples of the more populous states experiencing a downturn by using the Sahm Rule Recession Indicator.
Keep an eye on… broadening employment weakness.
Source: Bloomberg, to 31 May 2023. Past performance does not predict future returns.
The USD strengthened, rising 2.6% over the course of the month as measured by the DXY index. The USD made gains across all major currencies, specifically against the Euro and Scandinavian currencies as markets forecast an extension to the Fed’s tightening cycle, pushing back the potential of rate cuts. This saw the dollar return to levels seen in March.
The general downward trend that has been in place since October of last year is set to continue once the debt-ceiling situation is resolved as the flattening of the real yield curve has continued – an indication of USD weakness. Also, the USD remains relatively overvalued when looking at real effective exchange rate data giving another reason to expect the dollar to continue its weakening trend.
Keep an eye on… moves in the real yield curve.
Investment risks
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The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.