Gold received support from the decline in interest rates and positive inflows into exchange-traded funds, but its performance was hindered by lower inflation expectations and profit-taking
Gold’s impressive performance so far this year has left investors wondering what catalyst is needed to push the precious metal to break its all-time high, according to a World Gold Council (WGC) report released on May 10, 2023. One possible contender is a sharp equity market correction, given the lofty valuations in the face of deteriorating fundamentals.
Historical data shows that gold’s response during sharp equity corrections has been mostly positive, although the magnitude of the performance varies widely. To determine gold’s potential reaction, two key factors come into play: prior gold returns and real interest rates.
Based on current levels of these factors, it appears that gold’s response to a sharp equity sell-off could be at the higher end of the historical range.
Gold prices took a breather in April 2023, rising only by 0.1 per cent to reach $1,983 per ounce, according to WGC. This was due to profit-taking after the banking crisis in March, which had driven gold prices up. Inflation expectations also saw a slight pullback, which affected the precious metal’s performance negatively.
However, the drop in long-term US Treasury yields due to softer economic data provided some support. Global gold exchange-traded funds (ETFs) saw inflows, especially in US funds, while European gold ETFs had negligible outflows, which was a positive development.
According to information provided by Metals Focus, WGC’s data partner, early indications suggest that gold sales in India during Akshaya Tritiya were not as poor as anticipated.
“High gold prices hampered gold demand during quarter one (Q1), and expectations were for subdued festival sales in April. This could indicate that Indian consumers are becoming acclimatised to the higher price level, although we remain cautious on the demand outlook,” according to the WGC report.
Equities have been performing well even as recession risks mount. However, bonds and commodities have been signalling a recession since mid-2022, indicating that a recession could happen this year.
Despite this, growth and employment have been holding up, and the US Federal Reserve has been adding liquidity to the system. Equity margins remain close to record levels, and April is a seasonally strong month for equities.
Excess savings accumulated since the covid-19 lockdowns of 2020 have been contributing to demand-pull inflation and record levels of corporate margins. But concerns remain that those excess savings could soon be depleted, leading to lower spending. This, in turn, could lead to lower revenues, narrower margins, higher unemployment, higher delinquencies, and lower spending, creating a vicious cycle.
Gold continues to be supported by central bank buying, a reopening in China, geopolitical skirmishes, and a quiet revival in gold ETF and over the counter (OTC) demand.
But short-term pressures cannot be ruled out, including profit-taking, a bounce in the dollar, and abating banking fears.
However, gold’s performance during crises, particularly when those crises cause a material hit to risk assets, has been positive, although the magnitude of the response varies.
Given the possibility of a recession this year and the potential for equity markets to experience a sharp sell-off, being hedged prior to an event is prudent.
Gold can be a hedge during a crisis, but the magnitude of its response varies depending on several factors. Therefore, investors should consider gold as a part of their overall investment strategy and portfolio diversification.
Recession Concerns Sustain Gold ETF Inflows In April
The global gold market witnessed positive demand in April 2023, with net inflows totalling $824 million and gold holdings increasing by 15 metric tonnes.
The gold-backed ETFs and similar products, which are backed by physical gold, saw sustained inflows, albeit at a slower pace than in March. The declining yields and sliding dollar pushed April’s average gold price to the highest in a year.
Although gold reached a record high of $2,048 per ounce on April 13, it stabilised around the $2,000 per ounce mark, an important psychological threshold.
Regional And Fund-Specific Analysis Of Gold Holdings And Dollar Flows
All regions, except Europe, saw inflows in April 2023. North American funds attracted inflows of $984 million and 15 metric tonnes, while most funds experienced inflows.
Weaker-than-expected economic data worsened recession fears, suppressing Treasury yields and lifting safe-haven demand for gold.
Gold ETF flows in Europe turned negative again in April, losing $223 million and 0.7 metric tonnes. European funds lost $2.6 billion year-to-date (y-t-d), accounting for the majority of global outflows, with the UK and Germany’s funds losing the most. The other region witnessed $49 million inflow in the month, contributed entirely by Turkey.
Political uncertainties, continued currency weakness, and elevated inflation sustained Turkish investors’ interest in gold ETFs.
Trading Volumes Moderated In April
The daily trading volume in global gold markets reduced to $170 billion in April, seven per cent lower month-on-month (m-o-m).
Physical gold markets stayed active, with the average daily volume of the OTC market rising by 4 per cent. However, trading activities of exchange-traded derivatives and gold ETFs declined by 22 per cent and 4 per cent m-o-m, respectively.
The continued strength of the gold price sustained positive inflows into physically-backed gold ETFs in April, albeit at a slower pace than in March. The data indicates that investors remain concerned about recession fears, leading to the sustained demand for gold.
The analysis of regional and fund-specific gold holdings and flows in dollar also shows that the North American region led the global inflows, while Europe experienced outflows. Overall, gold ETFs and similar products remain an attractive investment option for both institutional and individual investors, according to the WGC report.