After slight fall in May, gold set to glow if US holds interest rate

The data showed that gold price decreased 0.9% in May to $1,964, bringing the year-to-date returns to 8.3%. However, the drop was minor and was due in part to the strength of North American currencies, particularly the US dollar and the Canadian dollar.

World Gold Council's Gold Return Attribution Model (GRAM) identified a drag from all identified gold drivers during May, led by an increase in opportunity cost, a decline in risk, and a drag from momentum factors. Still, gold was approximately 3.5% better off than these factors suggested it should have been.

The unexplained portion — or residual of GRAM — is statistically steady over time, but has been more positive than negative over the last 12 months, according to the research.

"We have addressed this phenomenon previously and posit three explanations: an omitted variable, a temporary shift in gold’s sensitivity to one or more of these factors, or noise. Candidates for omitted variables are central bank buying or a geopolitical risk premium," the World Gold Council said in its report.

Alternatively, if the model is estimated over the last three years rather than the entire 15, the indicated influence of interest rates reduces significantly in favour of an increase in the impact of foreign exchange.

As a result, it's probable that a portion of its GRAM's unexplained element is an investor movement from 10-year treasuries to two-year treasuries, as well as a larger attention on US currency swings in the future, the council said.

The report also provided an overview of the gold market in June, stating that recent strong data has resulted in slightly higher Fed terminal rates than anticipated and fewer cuts in 2023, which will be a short-term headwind for gold, but that greater clarity regarding when rates may peak will likely restore gold's link to longer-maturity yields, which will be a medium-term gold tailwind.

A debt-ceiling agreement may also be viewed unfavourably for gold because it prevents a potential default, which reduces demand for safe-haven assets, the council said. However, it did the opposite in 2011, at least in the near term. Given the massive stakes involved, political wrangling until the 2024 elections should strengthen support for gold.

In terms of regions, China's gold market saw gold reserves climb for the seventh consecutive month in May, but wholesale demand decreased, while gold sales in the United States fell substantially from April highs due to cooling inflation. In Europe, however, the European Central Bank's forecast of raising interest rates for the 13th time in a row in June to combat stubborn inflation may keep demand for gold high, the council said.

Overall, gold prices remain rangebound, having failed to establish a footing above the psychologically key US$2,000 mark, according to the council.

Amornthep Chawla, executive vice president and head of research office at CIMB Thai Bank, said that gold prices right now may be moving sideways. Most investors are waiting for the latest inflation data in the United States as well as the outcome of the two-day Federal Open Market Committee (FOMC) meeting on June 13-14.

He expected gold price would climb if the FOMC held its interest rate, which would deflate the currency and result in funds flowing back to gold.

However, he does not recommend buying so much gold in the portfolio because the global economy remains uncertain, and China is growing slower than predicted.

It is preferable to pay more attention to bond markets, he said.

Kritcharat Hirunyasiri, chairman of MTS Gold Group, a trusted gold jewellery outlet, said he was still bullish on gold, expecting it to achieve a new high by the end of the year due to geopolitical concerns, stubbornly high inflation, and economic uncertainties.