‘Sell in May and Go Away’? No Way for Gold

Article By 

V P Nandakumar

MD and CEO, Manappuram Finance Ltd

The adage may once again prove axiomatic for other financial assets but not for gold

The popular maxim, ‘Sell in May and go away’ is turning out to be true for most assets including stocks, bonds and even for several currencies. The maxim refers to the historically observed practice of a broad-based sell-off in financial assets as investors rush to book profit in May only to return to the markets after October. In other words, it
refers to the past instances of the financial markets remaining weak and volatile between May and October. This year too, this maxim is proving to be on the mark as stock markets across the globe are witnessing profit booking by investors while the ruction in the bond market remains elevated as the interest rate cycle is yet to peak with central banks keeping the rate corridor open.

A nuanced reading shows that all the major stock market indices are flashing red with widely tracked Dow Jones industrial average shedding 255.59 points or 0.77 per cent to close at 32,799.92 while broader index S&P 500 losing 30.34 points or 0.73 per cent to close at 4,115.24 points overnight as of May 25, 2023. The tech-heavy Nasdaq too closed on similar lines tanking 76.08 points or 0.61 percent at 12,484.16 points, mirroring the weak sentiments in the share markets cutting across segments, sectors and themes. Other major global stock indices such as FTSE, Dax, Kospi, Nikki 225, Shanghai Composite, Taiwan Weighted and Hong Kong were all sliding to lower levels through the trading days in May.

Indian stock indices too proved to be no exception to the `Sell in May and Go Away’ praxis and have fallen all through most of the trading days in May. For instance, BSE Sensex was down 174.1 points or -0.28% at 61,773.78 points while the broader index CNX Nifty 50 was down 51.25 points or 0.28% at 18,234.15 during the morning trade on May 25.

There is an array of reasons for the weaker performance of financial assets, especially the stocks, to remain volatile with a downward bias through May this year. Growing risks to global growth, and hence corporate earnings, could be held as the major culprit, while adding to the May mayhem in global stocks is the deadlock over the US debt limits talks. What added fuel to the fire is the decision by rating agency Fitch to put US credit on the negative watch list that stoked fears of a possible downgrade of the world’s largest economy’s debt.

However, the yellow metal remained as an island of stability amid a broad-based sell-off and volatility in financial assets through May. After taking a breather in April, gold resumed its northbound journey as it is fast regaining its natural status as the safe haven at times of economic uncertainty, hedge against inflation and above all wild swings in stock indices. There is another, and perhaps a more important factor, that is driving up gold demand world over – the burgeoning demand from major central banks who want to bolster their reserves by switching from the US greenback to good old asset, gold. This in fact adds one more source for gold demand which looks promising.

This new-found source of demand for gold is slated to go up tremendously as more nations look to settle their import and export trade in local currencies. While the explanation for why central banks are ditching the US dollar for gold to shore up their war chest is well documented and hence risks repetition, some data on central banks turning bullish on gold may be in order here.

According to the World Gold Council’s latest Gold Demand Trends report, the Central banks helped boost demand by adding 228 tonnes to global reserves, which is a record. These sustained and significant purchases from the apex banks underscore gold’s role in international reserve portfolios during times of market volatility and elevated risk. It is my view that against the backdrop of the banking sector troubles, ongoing geopolitical tensions and growing risks to global growth, gold’s moment under the sun as among the safest of safe haven assets has amplified. The buying binge from central banks adds one more leg to the gold’s rally. Going forward, I feel central bank’s buying is likely to remain strong and will be a key driver for gold demand through the running fiscal. To conclude, the increasing risk off sentiments among investors and elevated central bank demand is likely to keep gold the most sought-after asset class.

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