Gold Market Commentary: Gold rally takes a breather in April

Month in review

• Gold in US$/oz returned just 0.1% in April, consolidating after a strong run up during Q1
• Support for gold came from lower rates and positive ETF flows while lower inflation expectations and profit taking created a drag.

Looking forward

• The strong run-up y-t-d has left gold in need of a catalyst to break beyond its all-time high: one likely contender is a sharp equity correction, as valuations remain lofty in the face of deteriorating fundamentals
• Gold’s performance during sharp equity corrections has almost always been positive but has varied quite a bit in magnitude; prior gold returns and the level of real interest rates are key factors
• At current levels these two factors suggest gold's response to a sharp equity sell off could sit in the upper end of the historical range.

Weaker momentum and lower yields compete

Gold rose by just 0.1% in April, to US$1,983/oz,¹ as the March banking crisis - which had propelled gold sharply higher - abated and drove some profit taking (Table 1).

Our Gold Return Attribution Model (GRAM) indicates that April’s performance was negatively affected by the high return in March as the incipient banking crisis appeared to be well contained (Chart 1). A slight pullback in inflation expectations proved an additional drag.

In contrast, a drop in long-term Treasury yields on softer economic data provided some support and we note that another positive residual may point to continued central bank activity.

In addition, global gold ETFs experienced another month of inflows, mostly into US funds. European gold ETFs saw negligible outflows; a somewhat sanguine development given the weakness we saw for 10 months prior to March. COMEX futures followed suit, increasing longs by a modest 9 tonnes following a very strong March.

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