Author: Erin Zhou

Gold is one of the most watched asset classes this year, soaring from around $1600,2000 an ounce to over $5,2085 over the past year, breaking through an all-time high of $100,1960 in early May, but recently as the dollar index rebounded, gold continued to pull back more than $<> to below $<>,<>.

Is this a short-term pullback, or a trend reversal? How will global central bank gold purchases, consumer jewellery buying momentum, and gold-backed ETF investment affect gold prices?

Take profits after skyrocketing

As of Friday (May 5), the dollar index rose for three consecutive days, crossing the 19 mark, and traders widely expect the next target to be the March high of 103.3. Initial jobless claims fell to 105,88 last week, the biggest drop since 24, a better-than-expected figure that raised the probability of a Fed rate hike in June, with some Fed members, including Bullard, open to future rate hikes. The previous consensus was to pause interest rate hikes in June.

Due to the strong negative correlation between the US dollar and gold, the recent strength of the US dollar has undoubtedly hit gold prices. Coupled with positive signs in the debt ceiling negotiations and expectations of a soft landing in the US economy, these are hitting gold prices in the short term.

"Since the fourth quarter of last year, as inflation in the United States and Europe has begun to cool, rate hike expectations have declined. The dollar index correspondingly fell more than 115% from its high around 10, and the weakening of the dollar gave gold room to perform, with a correlation of -94% over this period. Michael Boutros, a senior analyst at GAIN Group, told reporters that now it is also because of the strengthening of the US dollar, gold has been negatively impacted, and under the suppression of the strong US dollar, the price of gold once fell below $1960 / oz.

Before May, the market's expectations of a Fed rate cut were too strong, which briefly caused the dollar to overfall and the price of gold to oversell. On May 5, gold broke through the all-time high of $5,4 an ounce, but overcrowded positions also mean that there may be selling pressure in the future. The US CPI data released on May 2080 was slightly lower than expected (5.10% y/y vs 4.9% expected), and the core data was in line with expectations (5.0% y/y), which led to an amazing selling pressure on the dollar on the day, although the dollar has since recovered its losses.

"At present, the gold/dollar is down more than 6% from the monthly and annual highs. It has broken below the low of the target price range, the May opening price range, and tilted near-term risks to the downside in the coming days. In other words, the price is moving closer to some important levels and has drawn the bearish front. Michael Boutros said.

For now, the movement of the US dollar will dominate the trend of gold, and the US dollar index is likely to remain strong for some time. A trader of a foreign bank told reporters: "At present, the US inflation is reduced, the expectation of suspending interest rate hikes is heating up, the unemployment rate is low, and the banking crisis is basically resolved, which makes the expectation of a soft landing of the economy strengthen." But at the same time, US interest rates remain high, high inflation also makes it difficult for the Fed to actually cut interest rates, and the dollar technically needs to rebound. ”

Traders expect the dollar index to hit above 105. Zhu Yanhua, an international business expert of a state-owned bank, also told reporters that from the technical perspective of the US dollar index, 102.7 and 104.9 are subdivision level resistance levels, while the previous high of the US dollar index of 105.8 is the subsequent big resistance level.

Under short-term pressure, gold's short-term upward attempts seem to have failed. Michael Boutros told reporters: "The last recent attempt by gold to break upwards above the month's opening price failed, and last week fell back below the monthly opening support ($1995/oz), which contributed to the decline we expected." He said that the first support level is now around $1950 / oz, then 1918 / oz, if it breaks below this range, gold prices may test further $1877 / oz and may have a larger correction.

However, after the second and third quarters, the dollar may weaken, "as the euro and pound may rebound, the Bank of England and the European Central Bank are expected to be more sustained than the Fed, and inflation in the UK and EU is still close to double digits." The above-mentioned foreign exchange trader said.

In May, both the European Central Bank and the Bank of England said they would continue to raise interest rates in the future. Among them, the Bank of England announced its interest rate decision on May 5, raising interest rates 5 times in a row. The country's inflation rate has reached double digits for seven consecutive months. Only once in nine months was it below 11%, but that was last August, and it was also as high as 12.7%. It is widely believed that this rate hike should not be the last action of the Bank of England.

The "long story" is still intact

In the medium and long term, gold's "long-term story" remains complete, that is, the trend of large institutions such as global central banks increasing their gold holdings continues.

Mark Mobius, the "godfather of emerging markets", recently told First Finance and Economics that the trend of "de-dollarization" is not exaggerated, "because the operation of freezing assets has led people to worry about the safety of dollar assets, so there will be a certain degree of diversified allocation behavior, and the United States should correct this operation."

"Given market expectations that the Fed may cut interest rates sharply by the end of 2023, the dollar remains under pressure, pushing gold higher. On May 5, gold prices rose intraday to $4,2062 an ounce, triggering some profit-taking, but the market is preparing for a significant higher price as the dollar may weaken further. Gary Dugan, chief investment officer of Middle Eastern investment institution Dalma Capital Management, told reporters. He also mentioned that "stock god" Buffett has previously said that the "incredible" period of growth experienced by the United States may have passed, "which is another voice that indicates that the best time to invest in American assets and the dollar has passed."

First Finance and Economics also previously reported that the World Gold Council's latest "Global Gold Demand Trend Report" showed that the purchase of gold by many central banks boosted gold demand, and the world's official gold reserves increased by 228 tons in the first quarter, hitting a record high. It is worth mentioning that the gold reserves of the People's Bank of China have increased for 6 consecutive months.

On May 5, statistics from the State Administration of Foreign Exchange showed that as of the end of April 7, the central bank's gold reserves were 2023.4 million ounces, compared with 6676.3 million ounces at the end of March, up 6650,26 ounces from the previous month.

Louise Street, senior market analyst at the World Gold Council, told reporters: "With some economies teetering on the brink of recession, gold as a long-term strategic asset may come into focus. Historically, gold investments have been positive returns in five of the last seven recessions. "In the first quarter of this year, European and American banking risks dominated the market. At a critical time of heightened market volatility and risk, large-scale and sustained official gold purchases highlight gold's role in international reserve portfolios.

"Some developed country central banks have begun to join the ranks of increasing reserves, prominent among which is the Central Bank of Singapore, which added 68 tons; followed by the People's Bank of China, which added 58 tonnes of reserves; Turkey is third, India is fourth, the European Central Bank is fifth, followed by the Czech Republic and the Philippines. The agency said.

In contrast, global jewellery consumer demand was more muted in Q478 at 198t. However, consumer demand for jewellery in China rebounded in Q<> to <>t.

"The performance of Chinese jewellery demand offset weakness in India, which consumed 78t in Q17, down 2015% y-o-y. The sharp rise in the price of gold in India has become a major factor affecting consumption. The World Gold Council said jewellery demand in China was the highest quarter since <>. Bar and coin demand also picked up significantly in Q<>. Improved economic growth, coupled with a significant rise in gold prices, has stimulated investor interest in physical gold. Going forward, seasonal factors, higher RMB gold prices and consumer travel spending are likely to contribute to a decline in jewellery demand in Q<>. However, the ongoing economic recovery and previously pent-up wedding jewellery demand is likely to help jewellery demand.