Dogged dollar strength

Gold came under pressure during May, ending the month with a US$59.58 (3.1%) decline to US$1,837.35 per ounce. The US dollar was the main headwind, rising sharply to reach 20-year highs on 12 May. The dollar has benefited from rising interest rates, the US Federal Reserve Bank’s (the Fed’s) tough talk on inflation and a favorable economic outlook compared with Europe and China. The chart below shows gold falling below its bull market trend-line that has been in place for three years now. We will be watching to see if gold either gets back on trend, establishes a new trend or begins trending sideways in a broad US$400 band defined by the highs and lows since the pandemic crash in 2020.

Figure 1: Has gold’s bull trend been bucked?

Source: Bloomberg, VanEck. Data as of May 31, 2022.

Gold stocks also came under pressure from heavy selling across the broader stock market. During May, the NYSE Arca Gold Miners Index fell 10.19%.

Primed for recession? Gold is ready…

Markets and the economy are beginning to show the signs of an imminent recession. Many retailers have cut their 2022 forecasts. Sales of new homes plummeted by the most in nearly nine years and pending home sales have been falling all year.

First quarter US GDP growth was negative and New York State manufacturing activity contracted in May for the second time in three months.

In markets, crypto assets, special purpose acquisition companies (SPACs) and technology stocks have intermittently been in crash mode all year. The S&P 500 entered official bear market territory, when on 20 May, it dipped to a 20% decline from its January peak.

To us, this feels like the dotcom bust in 2000, when technology stocks crashed and the S&P 500 ultimately fell 50% from its highs over a two-year period.

During the last four recessions since 1990, the Fed was the light at the end of the tunnel, aggressively stimulating the economy. However, those downturns occurred in a secular disinflation environment, where each recession began with an inflation rate that was lower than the last. Today, unless inflation miraculously comes under control, the Fed will have to choose between lower inflation and higher growth. It can’t have both, and it might get neither if stagflation (i.e., high inflation and no growth) sets in. Stratospheric debt levels compound the challenge.

Gold has touched on its all-time high of US$2,075/oz twice (see chart above), driven there first by the pandemic and then by the war. Regardless of the trend gold takes from here, we expect it to test the top of the range again over the coming year, driven by inflation, geopolitical tensions, a weakening dollar, other risk-driven events or if the Fed does a policy u-turn.