The Great Gold Divide: Record Central Bank Hoarding Can't Halt a 12% Monthly Plunge

Gold plunges 11.73% in May to $4,189 as Middle East ceasefire and strong US jobs data fuel dollar strength and rate hike expectations, while central bank and retail demand hits multi-year highs.

Gold is caught in an extraordinary contradiction. Physical demand from central banks and retail investors is running at multi-year highs, yet the spot price has tumbled below $4,200 a troy ounce — erasing all year-to-date gains and logging a 11.73% monthly loss. The metal now trades at $4,189, with the relative strength index flashing deeply oversold territory at 27. Two powerful forces have overwhelmed bullion's traditional safe-haven appeal: a tentative ceasefire between Iran and Israel, and a batch of red-hot US economic data that has revived expectations of further Federal Reserve rate hikes.

The geopolitical thaw in the Middle East — a partial truce that followed Iran's statement it had halted military operations against Israel — has deflated the risk premium that had buoyed gold in prior weeks. Simultaneously, the US labor market added 172,000 new positions in May, well above consensus, strengthening the dollar and pushing bond yields higher. Market-implied odds of a Fed rate increase in December now stand at roughly 70%, a brutal headwind for a non-yielding asset.

Analysts are scrambling to recalibrate their outlooks. Citi slashed its three-month price target to $4,000 from $4,300, warning that a prolonged closure of the Strait of Hormuz could drag the metal as low as $3,500. J.P. Morgan cut its average 2025 forecast to $5,243 from $5,708 — though it held its year-end corridor near $6,000, citing the long-term erosion of the dollar from US fiscal imbalances. UBS lowered its year-end projection to $5,500 from $5,900, while Goldman Sachs remains at $5,400. The wide divergence in estimates underscores the market's uncertainty about the path of monetary policy.

Yet beneath the price carnage, a structural support system is thickening. Central banks added a net 244 tonnes of gold in the first quarter, according to the World Gold Council. China's central bank alone extended its buying spree to a 19th consecutive month in May, accumulating roughly ten additional tonnes. Crucially, the composition of demand is shifting: physical investment in bars and coins reached 474 tonnes in Q1 — the second-highest quarterly figure on record — surpassing jewellery consumption for the first time. Buyers in China and India are providing a counterbalance to speculative liquidation on Western exchanges.

The short-term outlook hinges on today's US consumer price index release. Economists expect headline inflation to have climbed to 4.2% in May, the highest in nearly three years, propelled by surging energy costs. A hotter-than-anticipated print would bring Citi's $4,000 scenario into sharp relief and inject fresh selling pressure. A cooler reading, however, could allow gold to stage a relief rally toward its 50-day moving average near $4,620.

For now, the metal is caught between two opposing magnets: a robust physical bid from sovereign and retail hoarders, and a macro climate that keeps the dollar strong and rate expectations elevated. The CPI data will determine which side wins the tug-of-war in the near term.