Monthly gold update

Gold: Spotlight on May’s performance

The gold price increased by 1.8% in May to end the month at $2,327¹, although the metal did set a new all-time high of $2,450 during this time. Reviewing the data, gold reconnected with its traditional drivers of US real yields and US Dollar strength, though support from Chinese purchases and continued heightened geopolitical tensions also helped the gold price.

Gold couldn’t escape the widespread market sell-off that started at the end of July and carried through to the first week of August, as many investors scrambled to unwind positions on the yen carry trade. The gold price traded down towards US$2,380 but, as was seen in equities, recovered quickly and spent the rest of the month pushing significantly higher. After finding little resistance at US$2,500, gold would eventually set a new intra-day record of US$2,531 on 27 August.

The primary catalyst for the most recent surge in the gold price was from Fed rate cut expectations. August’s data seems to have ticked the final boxes for the Fed to finally cut interest rates in September, with the only question being the magnitude of that first cut. With reports continuing to ease any lingering inflation concerns, and the labour market showing signs of cooling, the market is pricing in a 66% probability of a 25 basis-point (bp) cut. The other 34% chance is based on the Fed having waited too long and cutting by 50 bps, which now seems unlikely, although any shock in the next batch of employment data could bring a larger cut back into play. 

At the Federal Reserve’s annual Jackson Hole Economic Symposium, Chair Powell gave a clear signal that the Fed would cut rates when it meets on 17-18 September. He also indicated the Fed stood ready to protect the US jobs market from further weakness after the largest-ever revision was announced by the Bureau of Labor Statistics just before the symposium got underway (818,000 fewer jobs were added to the economy than had been reported for the 12 months ending in March 2024). According to Powell, “The upside risks to inflation have diminished, and the downside risks to employment have increased.” 

US 10-year real yields ended May at 2.1%, 15 basis points lower than at the start of the month. Expectations for stronger revisions to the US Q1 GDP reading were missed, and it is likely at this point that real yields have hit this cycle’s high. This is a positive for gold due to the long-standing negative relationship between real yields and the price of gold, though as service and manufacturing activity remains relatively strong in the US, it may be some weeks before we see real yields break below 2.0%.

The US inflation reading gave the US consumer some relief as the monthly data point was lower than expected, providing the Fed with a greater opportunity to cut rates this year, boosting the price of non-yielding gold. Fed minutes were more hawkish than anticipated providing pushback on those market hopes for a rate cut. PCE inflation data was in line with expectations, but in aggregate the inflation readings showed progress is being made on core inflation with the risk this will not be maintained.

Keep an eye on … continued progress on inflation.

The US Dollar, as measured by the DXY index, fell 2.3% through August, although it firmed somewhat in the final few days of the month as data suggested the US economy could be able to avoid a hard landing. The DXY index reached its lowest level since July 2023, driven by the combination of USD weakness (with the Fed anticipated to begin cutting rates) and JPY strength (with the Bank of Japan raising rates in July for the first time since 2007 and suggesting more hikes could follow). As gold is priced generally in USD, a weaker Dollar makes it relatively less expensive for non-USD buyers.

Outside of economic drivers, gold has also been supported by recent escalations in the conflicts in both the Middle East and Ukraine, with investors seeking perceived “safe haven” assets. 

Keep an eye on …

US employment data ahead of the Fed’s next meeting in September, which could offer greater clarity on whether the first rate cut is likely to be 25 or 50 basis points;

The first debate between Trump and Harris for indications on how their respective policies could impact gold-related factors such as the USD, as well as which candidate gains in the following polls;

Whether demand for gold-backed ETPs picks up after the (presumed) Fed rate cut.