Van Eck’s gold strategist Joe Foster reports that the gold market moved to the beat of the Federal Reserve’s rate hike signal drumming in May.
He writes that at the beginning of May, the probabilities of a rate increase, as implied by the federal funds futures markets, were 12 per cent for an increase in June and 26 per cent for a July increase.
“That dropped to 4 per cent for June and 19 per cent for July by May 16. On May 18, the market interpreted the minutes from the Federal Open Market Committee April meeting as being more hawkish than anticipated and market expectations of rate increases in June and July jumped to 32 per cent and 47 per cent, respectively. Gold traded down for nine consecutive sessions following the release of the minutes. Gold dropped to an intra-day low of USD1,199 per ounce on May 30, and ended the month at USD1,215 per ounce for a loss of 6.0 per cent or USD77.66,” Foster writes.
The US dollar, which historically has a strong negative correlation with the gold price, also reflected the market’s assessment of a rate hike this summer, with the US Dollar Index (DXY) ending May up 3 per cent for the month. Foster writes: “The change in market sentiment regarding upcoming Fed rate decisions was primarily driven by comments from Fed Chair Janet Yellen and other Fed officials. Meanwhile, US economic data releases continued to be mixed, and, in our view, do not paint a clear picture of the US economy that would favour further tightening in the near term. Positive April economic data included retail sales and existing and new home sales coming in above expectations, and an increase in the ISM Manufacturing Index reading for May that was widely expected to be declining.”
However, employment data and construction spending were below expectations while the University of Michigan Sentiment Index, Consumer Confidence Index and manufacturing activity in Chicago and Dallas for May were all weaker than expected.
The most impactful announcement in Foster’s opinion was the May jobs report announced by the US Department of Labor on June 3. “Reported figures were massively below expectations, showing the lowest number of workers added in six years. While market chatter before the report’s release may have suggested the Fed had everyone convinced of a summer hike, a hike was not priced in for June, as evidenced by the 20 per cent implied probability. The chance of a July hike was only at 53.6 per cent.”
Foster reports that immediately after the jobs report, those probabilities dropped to 4 per cent and 29 per cent respectively, the DXY index fell (down 1.7 per cent) and gold rallied (up 2.8 per cent or USD33 per ounce), closing at USD1,244 per ounce on June 3.
With gold falling in May, gold stocks underperformed. The NYSE Arca Gold Miners Index (GDMNTR) fell 11.9 per cent, and the MVIS Global Junior Gold Miners Index MVGDXJTR) dropped 11.5 per cent during the month, trimming gains for the year to 65 per cent and 76 per cent respectively, as of May 31, compared to gold’s gain of 14.5 per cent.
Foster writes that the amount of gold held by global gold bullion exchange traded products (ETPs) increased by an additional 4.8 per cent during the month of May. Holdings of global gold ETPs have increased almost 27 per cent this year to an estimated 59.5 million ounces of gold, still well below the 2012 peak of more than 84 million ounces.
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