Monthly gold update

Gold: Spotlight on April’s performance

The gold price rose by 2.5% in April, ending the month at $2,286¹. The metal again broke multiple price records, ultimately setting a new-all-time high of $2,392 ahead of month-end. The key drivers for the upward trend remain intact, namely gold’s “safe-haven” status and macro tail risks.

Gold ended April $56 higher, another month-end price record, albeit this omits that the commodity set a new record each day in the first week of the month and finally set the current all-time high of $2,392 on 19 April 2024. Following a drop in Middle East tensions, gold gave back some of these gains, ending the month at $2,286. Given gold’s year-to-date performance, there seems to be a new floor of $2,000, grounded in expectations that the Fed will cut rates.

The central banks of both China and India confirmed in the month that they had continued to add to their respective gold reserves, albeit at a slower pace. The flow from central banks has been a strong driver of the gold price; the volumes in which central banks have been buying has been sufficient to break gold’s traditional relationships with real yields and dollar strength. This could leave gold vulnerable should these central banks wind down their purchasing programmes, but there are good reasons for Asian banks to be buying gold, specifically when other perceived “safe-havens” are falling, e.g., the Japanese yen and bonds.

Year-to-date, the gold price has appreciated 10.8%.

Keep an eye on … central bank gold purchases.

US 10-year real yields ended April at 2.2%, 33 basis points higher than at the start of the month. Historically, gold has performed well when real yields have been between -2.0% and +2.0%. This could now make gold more sensitive to inflation data as lower inflation would push real yields even higher. The read-through on higher inflation being a push-back in rate cut expectations, means a new focus is on the higher level of real yields. Overall, this divergence of the traditional negative relationship between real yields and the gold price can only be sustained for a finite period.

Previous episodes of record-breaking gold prices have occurred when real yields were negative (2011-12 with the European debt crisis and 2020 in the early stages of the pandemic). US economic activity remains strong, specifically when looking through the lens of the labour market, and combined with inflation data, the number of Fed rate cuts by year-end has fallen to one from three through April. This leaves the Fed funds rate far from the lows when gold previously broke price records.

Keep an eye on … real yields remaining above 2%.

The USD appreciated 1.0% in April according to the DXY index, following the repricing of Fed actions this year. There was also revising of other central banks’ actions over the month: the ECB is now expected to have three rate cuts by year-end (from the previous forecast of four); the BoE is now forecasted to make two rate cuts from previously three. The relative change between the US and its peers caused the USD to strengthen, but this was not to the detriment of the gold price.

The gold price was a beneficiary of the weak Yen, as mentioned above. That the Yen is at its weakest for almost 40 years has bred speculation that the BoJ will intervene, as it has done in the past. A consequence of the Yen situation is that confidence has waned in its status as a traditional “safe haven”, something which gold benefits from. Should the Japanese intervene in their currency, a stronger yen should in theory bring softness to the dollar, which gold would benefit from.

Keep an eye on … the Bank of Japan intervening to strengthen the yen.