In May, gold and silver prices rose significantly, which was facilitated by several factors, namely, the fall in the US dollar index, a decrease in bond yields and a collapse in the value of cryptocurrencies. Precious metals remain profitable investment objects, despite losses at the beginning of the year. A number of favorable market conditions will contribute to the increase in demand for precious metals in the second half of 2021.
Gold and silver quotes in May increased in dollar terms by 7.5% and 6.8%, respectively. In relation to the March lows of 2020, two precious metals have risen in price by 12.4% (gold) and 15.1% (silver), that is, they have been increasing in price for a year.
Gold and silver prices reached A $2,459 or A $35.77 per troy ounce, respectively. In May, yellow metal rose by 8.2%, and gray - by 7.5%. The exchange rate of the Australian dollar against the US dollar fell slightly in May, ending the month at 0.7725.
Many factors contributed to the increase in gold prices, including the weakening of the US dollar, which fell 1.4%, as well as the decline in the yield of 10-year US Treasury bonds to 1.58%.
The collapse in the value of bitcoin on 50% from a peak of $ 60 thousand at the beginning of this year also affected the increase in gold quotes. The collapse of the popular cryptocurrency showed that "digital gold" is not considered by investors as a reliable protective asset in the face of economic and geopolitical risks and may never even become one.
Interestingly, the restoration of gold quotes occurs simultaneously with the slowdown in inflation. Commodity prices have risen almost continuously since the end of the 1st quarter of 2020, but declined in the second half of May.
In a May report, the OECD predicted a 5.8% growth in global GDP in 2021, justifying its calculations by the successful vaccination process of the population. Note that the OECD's March forecast for this indicator was less optimistic - an increase of 5.6%, and in December 2020 a possible increase of only 4.2% was reported. Some central banks in developed countries are beginning to claim lower levels of economic stimulus.
Gold rose significantly in price after the lows of the 1st quarter of this year, and this indicates a difficult result of inflation or crisis, as many investors think. The increase in May yellow metal quotes shows that the rollback of quotes, which was observed from August 2020 to March 2021, was simply a normal correction in the context of the upward trend. The increase in the yellow metal exchange rate in May led to a resumption of the influx of shares in gold exchange funds, as well as continued demand for physical gold and an increase in the position of speculators in futures markets.
Retail demand for bullion and coins has been steady in Western countries for most of this year. The volume of physical gold sales increased by 36% year-on-year in the first quarter of 2021. During this period, the volume of sales of coins and bullion at the Perth Mint was especially high. This trend continued in April and May.
In China, demand was quite high for most of April even though margins were lower relative to global quotes. India is experiencing one of the largest health disasters in recent decades due to the high rate of coronavirus, which affects the state of the domestic gold market. Elsewhere in Asia, a sharp rally in gold prices in May led to a decline in demand, which is strikingly different from the high level of sales at the end of the first quarter and in April, when prices reached annual lows.
The following picture is observed in the market of speculative trading operations with gold: from April 27 to May 25, the number of long futures positions increased from 117.1 thousand to 143.9 thousand contracts, while the indicator for short positions decreased from 66, 5 thousand to 36.6 thousand contracts.
This is good news for the gold market. After a significant rally in the last weeks of May, the exchange rate will be around $1,900.
Inflation: seriously and for a long time?
Despite stabilizing inflation expectations at the end of May, official statistics show that over the past 12-15 months, the cost of basic food has sharply increased. In the United States, prices rose by 4.2% year-on-year. One of the main factors for the sharp increase in the overall inflation rate was an increase in energy prices by more than 25% per year. The rate of underlying inflation (excluding volatile cost items such as food and energy) rose least - to 3%.
There are two views as to how serious the rising consumer prices are for markets. Some believe that inflation is temporary and during the year its indicator will return to 2%, which is predicted in central banks. In this case, the increase in inflation over the past 12 months is explained by the effect of a low base. The current increase of 3-4% is lower than expected due to inflationary pressure in the conditions of the pandemic peak. Supply chain disruption due to the pandemic is a factor that affects inflation growth in the short term, so it normalizes over time.
According to an alternative view, the recent increase in consumer prices is the beginning of a multi-year period of increased inflation. In their opinion, fiscal incentives at the moment will provoke a significant increase in inflation. Central banks consider inflation a temporary phenomenon, but at the same time implement monetary incentives, which will be in force for a long time. Experts call this policy short-sighted. Central banks now not only issue money, but also buy various types of assets, as well as finance commercial banks, which can unbalance markets.
According to some analysts, central banks generally admit that within 2-3 years the inflation rate will be higher than the average. Bank executives are confident that after an upward trend in inflation, the Fed will begin to control it in order to bring it to the target of the end of 2020.
If inflationary pressure continues to rise, then gold will have a positive real return. For example, average nominal and real gold yields in annual terms can reach 15.1% and 8.2%, respectively, if the inflation rate exceeds 3%. With inflation below 3%, the nominal and real yields are 5.6% and 3.6%, respectively.
However, this does not mean that changes in the inflation rate will correlate with the investment attractiveness of gold. Yellow metal always plays an important role in the portfolio, regardless of the dynamics of consumer prices.
Risk of financial bubbles continues to rise
Gold is a protective asset, because its quotations rise as inflation increases, real interest rates fall or the value of risk assets, such as stocks, decreases.
The growth of stock indices is due to a decrease in real interest rates to low and negative values combined with a high level of fiscal and monetary stimulus. This poses serious risks to traditional asset classes. A wide variety of indicators indicate a disappointing trend in the profitability of risky assets: from coefficients expressing the ratio of the price or market value of the share to annual profit, to a multiplier showing the ratio of the price to the number of sales. Stock market indices have already reached or are near a historic high, foreshadowing a period of much lower returns up to 2030, along with significant adjustments and volatility.
Jeremy Grantham, a British investor and founder of Grantham, Mayo, Van Otterloo & Co (USA), is confident that a "bubble" has formed in the stock markets, which can burst at any time, causing serious financial losses to those who are not prepared for this. According to the expert, at the moment, inflation hedging instruments, including commodity ones, are more attractive investments. Of course, no one guarantees that in the near future there will be a sharp correction in the stock market, but it, one way or another, is not far off.