The golden metal did not start the year very well, in February it accumulated a decline of 11% while the economic reopening and vaccination progressed. However, as the contagion subsides one of the markets’ biggest fears seems to have come true, inflation has arrived and fears of a runaway price rise are pushing gold higher. Bullion recovers all the ground lost in the year and rises more than 7.5% in the month of May, thus standing above $1,900 and on track to close its best month since July 2020.
Federal Reserve sources have warned that they expect further upward pressure on prices as the economy reopens and amid high pent-up demand. However, the same experts point out that these pressures should be temporary as supply problems diminish. The year-on-year US Personal Consumption Expenditure (PCE) Price Index rose to 3.1% in April, the biggest jump since 2008.
Investor interest in gold has also returned. Hedge funds have raised their positions in the metal to the highest level since early January. “Gold is headed for its biggest monthly gain since July as inflation remains the key focus. The recovery in bullion-backed ETF holdings and futures fund positions remains subdued, a sign that many investors remain not convinced about the direction in the short and medium term,” said Ole Hansen, head of commodity strategy at Saxo Bank.
The US non-farm payrolls report scheduled for Friday heralds a crucial time for investors to assess whether the slight job gains seen last month were a momentary blip or the start of something more lingering. “With gold breaking above the $1,900 level there is clear bullish momentum in demand for precious metals at the moment. A weak non-farm payrolls number this Friday may rock gold prices towards the $1,975 level “says Howie Lee, an economist at Oversea-Chinese Banking Corp.
Mention has traditionally been made of the inverse relationship between the gold metal and the dollar and US fixed income. Thus, in the month of May while gold rebounded, the Bloomberg Dollar Index fell 1.39%, erasing the gains it accumulated in the year (in March it rose 3.7% so far in 2021). For its part, the 10-year US debt has also fallen over the last 31 days, the return on the bond began the month above 1.62%, while it currently stands at 1.59%.
Another aspect that could be benefiting gold is bitcoin. In recent months, the debate has increased over whether the world’s largest digital currency could be considered a safe-haven asset like gold. The strong debacle that bitcoin has experienced in the month would have pushed bullion further upwards, the cryptocurrency fell by more than 35% in May, thus standing above 37,100 dollars, well below its all-time high marked on April 15 in the $63,410.
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