With the exception of last Wednesday when the Minutes from the May meeting of the Federal Open Market Committee had a hawkish tone that gave the dollar a boost, gold and silver continued their upward path last week as the markets continued to look at geopolitical and inflationary risks. The Fed Minutes appeared to show that the Fed is more hawkish than the markets have been pricing in, but gold essentially took this in its stride and as we write on Monday morning spot is trading around $1,860 and silver is above $22.
The dollar is still clearly a key driver in the gold market. From its mid-May lows gold is up 2.6% in dollar terms, while in Swiss franc terms gold has shed 1.2% since that same date; in euro terms it’s down by 1.1% although the weakness in the yen has boosted gold in Japanese terms by 1.1%.
European two-year interest rates
Sentiment is mixed. Some market participants are concentrating on the prospect of more aggressive moves from the Fed, while others are more concerned with persistent inflationary forces. Others again are looking at the increasing possibility of stagflation (where inflation is higher than the markets have discounted and growth is lower that the markets’ expectations). A further complicating factor is the rising inflation in Europe, with the European Central Bank now looking likely to raise rates in June. This could in theory give the euro something of a boost, but European real rates are currently solidly in negative territory with the two-year yield most recently at minus 7%; this is likely to come under more pressure following inflation numbers that were released today (Monday 30th May). In Germany the North Rhine Westphalia CPI posted a year-on-year increase of 8.1%, but this will be to some extent inflated by pandemic-related dislocations last year; more worryingly, though, the month-on-month change was +0.9% after +0.6% in April. Further, Spain’s national CPI number was released today, registering 8.7% year-on-year after 9.3% in April, while the month-on-month change was 0.8% after minus 0.2% previously. Core CPI was 4.9% year-on-year, after 4.4% in April. Italy’s PPI was up 44.2% year-on-year, and while very high, it was at least marginally below the 46.5% print in April. European bonds are under pressure accordingly.
Meanwhile the EU is trying to push an embargo on Russian oil into law, but is still facing resistance from Hungary.
Gold and the Misery Index – United States
Meanwhile in the United States the Misery Index, which is an unweighted combination of CPI plus unemployment, is still on the rise. Its correlation with the gold price is high, standing currently at 0.75 on a ten-year basis, at 0.79 on the five-year basis, and over just one year the correlation is 0.91.
On that contention, then, the arguments favour gold as the appropriate risk hedge (apart from inflation indexed bonds, of course).
On the COMEX exchange, the Managed Money positions in gold saw some bargain hunting and short covering in the week to 24th May, when gold was trading up towards $1,870; silver also saw some fresh buying interest but, in this metal, the outright shorts also expanded., taking silver into a net short position for the first time since June 2019. There is always a possibility of a vicious short covering rally in this metal, so exposed sorts should tread with care.
Meanwhile the Exchange-Traded Products are showing a more bullish tendency. After 18 days in late April and early May in which the gold funds only saw one day of creations, we have now seen additions to holdings in five days out of the past seven, for a net increase of 10.4t for net investment of $620M, while silver has been choppier with overall losses of 354t in May to date. This though is small in relative terms, amounting to just 1.2% of the end-April total.
Gold and silver; outright, correlation and ratio
