Gold rush on the cards amidst rising inflation and weak dollar

Summary

  • Gold prices surged 8% during May, the highest monthly gain since July 2020.
  • Fear of rise in inflation and weakening of dollar are catalysing the current price rise.
  • Investors are keeping an eye on Treasury bond yields and inflation data to decide on their positions on gold holdings.
  • Silver has also followed in the footsteps of gold and is currently trading above USD28.00/ounce.

Gold prices have leapt to a four-month high, trading above USD1,900 per ounce. Market analysts are attributing the current rally in the yellow metal to weaker dollar and lower bond yields. Today, gold futures were trading around US$1,910.25 per troy ounce.

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Gold price chart for the last one year (Image source: Refinitiv)

Good read: Three ASX gold stocks to light up your portfolio as gold prices heat up

The rally is also supported by the key economic data released by China, which is the largest consumer of gold. China’s Manufacturing Purchasing Managers Index (PMI) and non-manufacturing PMI stood at 51 and 55 in May, respectively. Notably, a PMI above 50 indicates growth. Although the figures were slightly less than the forecasts, they are still good enough to indicate that the Chinese economy will continue to grow, and demand will be higher.

In India, the second largest gold consumer, demand remained weak amidst lockdowns and restrictions as the country is trying to break free from the grip of the deadly second wave of COVID-19.

Rising inflation and weaker dollar price are lighting a fire under gold prices in the international market. Gold bulls are drawing support from rising bullion prices and hope to breach the magical USD2,000/ounce level.

Monthly gain in gold price in last one year (Image source: Refinitiv)

Informative read: 4 Resource-Rich Gold Stocks on ASX

From the above chart, it can be seen that gold prices appreciated nearly 8% in May 2021. This is the highest gain in terms of percentage since July 2020. Silver prices have also been catapulted amidst rising gold prices, moving up 1.5% to US$28.00 per ounce in the international market.

If the dollar weakens further and bond yields slide down from the current level, gold may breach its all-time high in the current rally. Traders and investors are now eagerly waiting for the key economic data from the US for May 2021. The data released last week revealed that the Core Personal Consumption Expenditure Price Index rose 3.1% YOY in April.

Good read: Why investing in gold stocks can add feather to your portfolio cap

What to expect?

Bullion prices are expected to be highly volatile in coming weeks. If the US economic data turns out to be better than expected with better unemployment data and key inflation figures, gold and silver may experience a drop in their current prices. Treasury yields will increase in such a scenario and money will flow from commodities to the Treasury bonds.

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Read here: 3 quality gold stocks to hold for 2021

If the inflation and dollar slide further from here, it will add fuel to the current momentum. All eyes are on the Institute of Supply Management manufacturing PMI data.  

Amidst rising gold prices, some of the ASX-listed gold stocks to watch out for are: De Grey Mining Limited (ASX:DEG), Newcrest Mining Limited (ASX:NCM), Northern Star Resources Limited (ASX:NST), West Wits Mining Limited (ASX:WWI) and Silver City Minerals Ltd (ASX:SCI)


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