Sticky Inflation Boosts Gold
15 May 2024
Read Time 6 MIN
Monthly gold market and economic insights from Imaru Casanova, Portfolio Manager, featuring her unique views on mining and gold’s portfolio benefits.
Gold: reaching new all-time highs (again)
Gold’s strength continued in April, with the spot price of the metal repeatedly reaching new highs throughout the month. Gold traded at an intraday high of $2,431 per ounce on 12 April, and closed as high as $2,392 on 19 April, which coincided with the S&P 500 Index1 and the NASDAQ Composite Index2 lows for the month. Gold pared back gains as the broader equity markets bounced back, but still managed to outperform, closing at $2,286.25 on 30 April, up $56.38 per ounce or $2.53% during the period. This compares to monthly losses of more than 4% for the S&P 500 and NASDAQ, and a gain of 1.60% for the U.S. dollar (DXY Index3).
Inflation in the driver’s seat for now?
Changing expectations around the U.S. Federal Reserve’s (Fed’s) monetary policy path were a major driver of gold prices in 2023. Gold generally found support as the odds of Fed rate cuts increased and vice versa. This year, however, we are starting to see a decoupling between Fed path expectations and gold. The odds and number of cuts expected in 2024 have been reduced significantly in the first months of the year, yet gold keeps making fresh highs. We think this may be driven by renewed concerns around inflation.
In April, for example, an inline jobs report for March, combined with higher-than-expected CPI figures that showed an uptick in inflation in the U.S. (3.5% year-over-year in March vs. 3.2% in February), translated to U.S. consumer sentiment declining by more than forecast and inflation expectations increasing. The University of Michigan’s preliminary April Consumer Sentiment Index4 dropped to 77.9 from 79.4 in the previous month and compared to the median estimate by economists of 79. Consumers estimated prices will climb at an annual rate of 3.1% year on year, up from the 2.9% expected a month earlier and the highest so far this year. Later in the month, Q1 2024 preliminary annualized quarter-over-quarter GDP came in at 1.6%, well below expectations of 2.5%, while the Core Personal Consumption Expenditures Index5 was up 2.8% year-over-year versus estimates of 2.7%. Anecdotally, the use of the word “stagflation” in the headlines of news articles and reports appears to have ticked up significantly during the month.
Expectations for slower economic growth and higher inflation are generally supportive of gold prices. A pullback of the broader equity markets, like we had in April, and rising global geopolitical tensions provide further support, as investors turn to gold as a safe-haven and portfolio hedge/diversifier.
Western investment demand still absent
Yet, western investors appear mostly absent in the gold markets today, with recent strength fueled by central banks, and demand out of Asia, primarily China. The World Gold council reported that global gold bullion backed ETFs lost 114 tons during Q1 2024, a 4% decline in total holdings.* Interestingly, while North America and Europe saw ETF outflows, Asian listed funds had inflows during the quarter, the fourth consecutive quarter of inflows.
Gold ETF Flows and Assets
Source: World Gold Council. Data as of 31 March 2024.
Investment demand, the main driver of gold prices historically, has been in decline during this last gold rally. We believe the return of Western investment demand supported by increased risks to the U.S. economy and a deeper correction of the equity markets, has the potential to drive gold prices even higher. How much higher? The last time gold bullion backed ETF holdings were at around current levels was in late 2019. By late 2020, about a year later, these holdings had reached peak levels and the gold price had risen over $400 per ounce. Thus, If ETF holdings were to return to their historical peak (reached in 2020) and based on the same historical correlation between these holdings and the gold price during that period, it is not unreasonable to assume that gold could climb another $400 per ounce from present levels. However, while calculations based on historical data can provide estimates for the future, such estimates may not necessarily become reality.
Gold Price – Nominal vs. CPI-Adjusted
Source: VanEck, Bloomberg. Data as of 31 March 2024. Note: January 1980’s intra-month high of $815 (in nominal terms) would be equal to approximately $2,819 in today’s (2024) dollars.
Of course, that would require the continued support of the current drivers of demand—particularly the official sector. Central banks have emerged as an important driver of gold prices over the last two years. They appear to be on a longer-term trend of gold buying. Central banks net purchases of gold in Q1 2024 (290 tonnes) represented the highest quarterly figure on record since 2000, and was 69% higher than the five-year quarterly average of 171 tonnes, demonstrating the banks’ accelerating appetite for gold despite the metal’s strong rally during the period.† However, it’s a little too early to assess how price sensitive these purchases may be and whether further gains in the gold price could dampen demand from this sector. Gold has had a very impressive rally so far this year. We wouldn’t be surprised to see gold pulling back a bit and entering a period of consolidation at a lower level from present, though still well above $2,000, before embarking on the next leg of its rally.
Miners gain back ground
Talking about peaks…the gold miners have certainly covered some ground over the last couple of months, but they are still nowhere near their all-time highs. After a very strong March, the NYSE Arca Gold Miners Index (GDMNTR)6 and the MVIS Global Juniors Gold Miners Index (MVGDXJTR)7 continued to significantly outperform gold in the month of April, up 6.11% and 6.28%, respectively. GDMNTR closed at 1,164.30 on 30 April, compared to its September 2011 high of 1971.01, when gold was trading at approximately $1,800 per ounce. This suggests there may still be plenty of runway for gold stocks as they reclaim their role as a leveraged play on the gold price. Our expectations of a sector re-rating are not only supported by continued strength in the gold price, but also anchored to generally solid company fundamentals. We are encouraged by financial and operating results reported by gold companies for Q1 2024, which seem to be mostly in-line with expectations for the group so far.
Relative Price Ratio – Gold Miners vs. Gold (Sep-2011 and Aug-2020 to Apr-2024)
Source: FactSet, Bloomberg, VanEck. Data as of April 2024.
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All company, sector, and sub-industry weightings as of March 31, 2024, unless otherwise noted.
† Central Banks - World Gold Council.
1 S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities. The index is a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors including information technology, telecommunications services, utilities, energy, materials, industrials, real estate, financials, health care, consumer discretionary, and consumer staples.
2 NASDAQ Composite Index is a market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange.
3 U.S. Dollar Index measures the value of the U.S. dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.
4 University of Michigan Consumer Sentiment Index is a monthly survey of consumer confidence levels in the United States conducted by the University of Michigan.
5 Core Personal Consumption Expenditures Index is a price index that tracks how much consumers are spending on goods and services. It's frequently used to measure inflation.
6 NYSE Arca Gold Miners Index is a service mark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by VanEck UCITS ETF plc. (the “Fund”) in connection with VanEck Gold Miners UCITS ETF (the “Sub-Fund”). Neither the Fund nor the Sub-Fund is sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding the Fund or the Sub-Fund or the ability of the NYSE Arca Gold Miners Index to track general stock market performance. ICE DATA MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE NYSE ARCA GOLD MINERS INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL ICE DATA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The Fund have not been passed on as to its legality or suitability, and is not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data.
7 MVIS®️ Global Junior Gold Miners Index is the exclusive property of MarketVector Indexes GmbH (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MarketVector Indexes GmbH (“MarketVector”), Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Junior Gold Miners UCITS ETF is not sponsored, endorsed, sold or promoted by MarketVector and MarketVector makes no representation regarding the advisability of investing in the Fund.
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Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
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