Gold price on course for biggest monthly gain since July

Gold prices held firm on Monday and are on course for their biggest monthly jump since July 2020, as growing inflationary pressures continue to provide a boost to bullion’s appeal.

Spot gold dipped by 0.2% to $1,904.41 per ounce by 11:45 a.m. ET, but is still up 7.7% for the month. US gold futures saw a modest gain of 0.1% to $1,908.20 per ounce on the Comex.

Meanwhile, the US dollar — often viewed as an alternative to bullion — is headed for a second month of decline, with the US Dollar Index down 0.2% on Monday. The yield on 10-year US treasuries also fell, reducing the opportunity cost of holding non-interest bearing gold.

“The dollar is staying weaker, that’s fairly supportive. Gold bulls now have their eyes set on $2,000, and most are thinking it’s going to go quite a lot higher,” Stephen Innes, managing partner at SPI Asset Management,  told Reuters.

Speaking of opportunity cost, inflation risks remain in focus as investors await key US jobs data due later this week, which will offer clues on the progress of economic recovery.

Data on Friday showed US consumer prices surged in April, with a measure of underlying inflation blowing past the Federal Reserve’s 2% target and posting its largest annual gain since 1992.

Some Federal Reserve officials have said that recent price pressures are to be expected as the economy reopens amid pent-up demand, and should prove temporary as supply glitches abate. The PCE price index — which the Fed uses for its inflation target — rose 3.6% from a year earlier, the biggest jump since 2008.

“For as long as the Fed refuses to change its monetary policy in response to rising inflation, real interest rates will continue sliding ever further into negative territory, which is good news for gold,” Commerzbank analyst Carsten Fritsch said.

Bullion erased its 2021 losses this month amid signs of accelerating inflation and a potentially uneven economic recovery due to the resurgence of covid-19 in some countries.

Investor interest has also returned, with hedge funds and other large speculators boosting their net-long position in gold to the highest since early January. Holdings in bullion-backed exchange-traded funds climbed for the first time in four months in May, but the gains remained far short of those seen during last year’s record rally.

However, “the recovery in ETF holdings backed by bullion and fund positions in futures remain subdued, a sign that many investors remain unconvinced about the short to medium-term direction,” warned Ole Hansen, head of commodity strategy at Saxo Bank A/S,  in a note to Bloomberg.