Gold wavers amid market euphoria


Gold was down US$43.38 per ounce or 2.2% for the month, closing at US$1,919.35 on June 30. Two- and ten-year treasury yields climbed higher in June. Notably, the US dollar did not contribute to the drop in gold’s price, as the US dollar index (DXY) was also down in June (-1.4%).

Instead, gold was pressured by the relentless strength of the US equity markets, which were undeterred by the outlook for more rate hikes this year, and the recession signals sent by the inverted treasury yield curve. The S&P 500 and the NASDAQ 100 were both up more than 6.5% in June, posting double digit gains for the year, with the tech-heavy NASDAQ up a whopping 39% in the first half of 2023. Apple closed the month at a milestone US$3 trillion market cap, the world’s first company to reach such valuations.

Other factors that fueled market’s optimism include: a notable revision to first-quarter GDP annualised growth to 2% from 1.3%, better-than-expected economic releases (e.g., US May retail sales, housing starts, jobless claims, consumer sentiment), slowing inflation, as well as comments from the US Federal Reserve (Fed) chairman and Treasury Secretary that downplayed the risk of a recession.

The NYSE Arca Gold Miners Index felt the pressure of a declining gold price, dropping 5.19% during the month of June. Following a dreadful month for gold equities in May, we were pleased to see gold equities performing in line with our expectations in June. In a year when average gold prices have reached record highs (US$1,934 in the first half of 2023), we expect strong gold mining sector fundamentals to progressively reduce the valuation gap between the metal and the stocks.

Gold’s drivers remain the same

Our outlook for higher gold prices in the longer term is unchanged, supported by the risks imposed by sustained elevated interest rates, sticky inflation, continued global geopolitical tensions, a trend by countries around the world to diversify away from the US dollar and increase their gold reserves, and the pending risk of a US and/or global economic recession. Investors continued to stay on the sidelines of the gold market. Global gold bullion ETF holdings, our proxy for investment demand, declined 1.64% during the month of June, leading to net outflows year-to-date of 1.21%.

Gold failed to hold above US$1,950 per ounce. It may now trade sideways around the US$1,900 level, until a new catalyst emerges. A Fed skip which signaled the nearing of the end of the tightening cycle, failed to provide impetus for gold and attract investors. But as the end of the hiking cycle approaches, the reasons for a pause and the implications on inflation, could become important gold price drivers.

Published: 13 July 2023

Any views expressed are opinions of the author at the time of writing and is not a recommendation to act.

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