The dollar bull narrative could be running short of arguments for the next leg higher, which, in turn, could be positive for gold, the World Gold Council said on Thursday.
According to WGC data, gold posted a third consecutive monthly gain in May, rising by two per cent month-on-month to $2,348 per ounce. Despite the more moderate gain compared to March and April, gold hit a new all-time high of $2,427 mid-month before pulling back – “likely reflecting some profit taking’, the WGC said. 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 ($524 million) for the first time since May 2023.
There was no single variable that stood out as a key driver in May, according to the WGC. 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,” the WGC said in a report.
On the macroeconomic front, a ‘no landing’ scenario in the US 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 US data particularly as it remains close to the top end of its 52-week range,” the WGC said.
In addition, the ongoing improvement in global growth outside of the US could temper dollar performance as the currency tends to appreciate during times of risk and vice versa.
The average trading volume across global gold markets stood at $254 billion per day in May, 11 per cent lower than April. But overall, volumes across markets remained well above the 2023 average of $163 billion per day. Trading activities at key exchanges fell by 17 per cent: while volumes at the COMEX remained stable, a more significant drop at Shanghai Futures Exchange (-45 per cent) and Shanghai Gold Exchange (-35 per cent) were the main contributors. Gold ETF trading volumes also fell across major markets, averaging a 39 per cent month-on-month decline globally. Over the counter physical gold trading activities held up, only shedding 5 per cent m/m, based on the most recent information, WGC data showed.
“While gold has largely brushed off the stronger dollar recently as Eastern buyers have shifted their behaviour (buyers in emerging markets appear to be less attentive to the US dollar or Western monetary policy expectations), a weaker dollar going forward could bring back Western investors who are waiting for a trigger,” the WGC said.