Hiking Up a Volcano
Gold softened in May, falling 1.0% to finish the month at US$4,546/oz. The decline was modest, but it reflected a market that is still digesting several competing forces: positive risk sentiment, softer global gold ETF flows, and continued uncertainty around the path of US interest rates. US dollar weakness provided some support, but it was not enough to fully offset the short-term pressure from stronger equity markets and neutral futures positioning.
The Big Picture
The question for gold is shifting from when the Federal Reserve will cut rates to whether it may need to hike again if inflation remains persistent. While higher rates usually pressure gold through stronger real yields and a stronger US dollar, this cycle may be different. If future hikes are seen as a sign of inflation stress, fiscal pressure, policy risk, or economic fragility, gold could benefit as investors look for protection rather than take it as a sign of confidence.
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Key Market Drivers
Gold Consolidated After a Strong Run: Gold fell 1.0% in May as the market entered a quieter consolidation phase. Positive risk sentiment and modest ETF outflows weighed on performance, while US dollar weakness provided partial support.
The Fed May Be Forced Back Into Focus: Inflation pressures remain a key concern. If the Fed is pushed towards further tightening, the impact on gold will depend on how markets interpret the move. A hike that signals policy credibility may pressure gold, but a hike that signals economic fragility, fiscal stress, or policy error risk could support demand for gold.
ETF Flows Remained Soft: Global gold ETF flows were lacklustre in May, with outflows from Asia and the US partially offset by modest inflows in Europe. This suggests that short-term investor positioning remains cautious, even as the medium-term case for gold remains intact.
The Stock-Bond Connection
The same fragile environment remains in place. If inflation stays persistent and rates move higher, both equities and bonds could come under renewed pressure. Strong risk sentiment helped equity markets in May, which temporarily reduced demand for gold. However, higher long-end yields have repeatedly disrupted equity rallies in recent years. In that scenario, gold remains an important portfolio anchor, particularly when traditional stock-and-bond diversification becomes less reliable.
Looking Ahead
Gold may face near-term pressure from softer ETF flows, weaker physical demand, and technical resistance, but the medium-term backdrop remains constructive. Central bank demand, China and India buying, fiscal concerns, geopolitical risk, and potential US dollar weakness continue to support the long-term case. We view the current weakness as consolidation within the broader gold uptrend, not a structural reversal.
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