In May, gold experienced a 0.9% decline, settling at $1,964 per ounce. The drop was largely attributed to the strength of North American currencies, namely the US dollar and the Canadian dollar. However, in other currencies, gold actually saw gains. This divergence in performance suggests that currency movements played a significant role in determining gold's value during the month.

The Gold Return Attribution Model (GRAM) indicates that various factors influenced gold's performance in May, including a rise in opportunity cost, a fall in risk, and a drag from momentum factors. Despite these factors weighing on gold, it outperformed the model's expectations by approximately 3.5%. This unexplained portion of gold's performance could be attributed to omitted variables, a temporary shift in gold's sensitivity to certain factors, or noise in the market. Potential omitted variables include central bank buying or a geopolitical risk premium.

While Managed Money net long futures positions on COMEX fell by 79 tonnes, global gold ETFs added 19 tonnes to their holdings for the third consecutive month. This indicates continued investor interest in gold despite the overall decline in prices.

Looking Forward: Considerations for June

One of the key factors influencing gold in the near term is the possibility of a Fed rate hike. The expectation of another rate hike has led to higher bond yields, which could temporarily weigh on gold. However, re-establishing a link with the 10-year TIP yield, which is currently lower than the 2-year yield, could provide some support for gold. This potential shift in focus by investors from longer-term Treasuries to shorter-term Treasuries and US dollar movements may explain the recent dominance of the 2-year yield in influencing gold returns.

The resolution of the debt-ceiling uncertainty removes some fear from the markets. However, the implications of what follows the agreement could be favorable for gold. Historically, debt-ceiling deals have had mixed effects on gold prices, with some instances leading to near-term weakness, while others resulted in a positive reaction. Given the high stakes and partisan wrangling leading up to the 2024 elections, gold may find support as uncertainty and political tensions persist.

Conclusion

Although gold experienced a marginal decline in May, its performance was influenced by currency movements, with gains seen in currencies outside of the US and Canada. Despite factors such as a rise in opportunity cost and a fall in risk, gold outperformed the expected performance based on various drivers. The unexplained portion of gold's performance could be attributed to omitted variables or temporary shifts in gold's sensitivity to certain factors. Looking ahead, the potential impact of a Fed rate hike and the resolution of the debt-ceiling uncertainty could provide both headwinds and tailwinds for gold. The link between gold and the 10-year TIP yield may strengthen, while the outcome of the debt-ceiling agreement remains uncertain, potentially affecting gold prices in the near term.