An anniversary to remember for gold!

In this week's market update:

• Precious metal market performance was mixed this week, with gold holding above USD $2,500 per troy ounce (oz), while silver fell by 3%, last trading at USD $28.80oz.

• Prices were slightly stronger in Australian dollars, owing to a -1% fall in the value of the local currency, which is currently worth USD $0.672.

• The stability in gold, and minor correction in silver occurred against a backdrop of heightened sensitivity to risk, with equity markets in Australia (-1%) and the United States (-2%) declining.

• Commodities were even softer, led by oil which fell by 9% for the week, with crude now trading below USD $70 per barrel.

• Bitcoin was also caught up in the sell off, down 5% to $56,000, with the market still 10% lower than where it was in late 2021.

The case for gold in multi-asset portfolios
Precious metal market performance was mixed this week, with gold holding firm above USD $2,500oz, while silver saw a minor pullback, falling by 3% to USD $28.80oz.

The price action in the precious metal market has healthy given the broader market context, with commodity markets selling off, led by oil, which plunged below USD $70 per barrel, while equity markets and cryptocurrencies also took a dive.

In precious metal related news this week we have seen several comments of note, including:

• Despite the recent price strength, TD Securities are definitely not in the gold bull camp (at least in the short-term), with Daniel Ghali, a senior commodity strategist at the firm speaking about the current risks to the gold market, noting money manager positions are now at what have been historically elevated levels, a comment that was noted in an article on FX Street.

• Irrespective of whether one is a bull or a bear, it wouldn’t surprise to see gold tread water in the coming days, as markets await the latest payrolls data in the United States, with all eyes on the Fed and whether they’ll go with a 0.25% or 0.50% rate cut at their policy meeting later this month. This may keep investors on the sidelines for now, with market pricing suggesting there is a 45% chance the Fed will go with the larger cut (i.e. 0.50%) to get this easing cycle underway.

• The World Gold Council noted that a 25 basis point rate cut by the Fed is all but baked into the gold market already, though the return to inflows in the gold ETF market could cause another leg up in the bullion market.

• Schroders were out with a great research piece on the gold market, and how it is evolving, with their report noting that; “The gold market has evolved substantially as speculative investors have become the dominant force driving market dynamics over the past two decades. This has created an opportunity to allocate to gold as long-term returns appear compelling. That said, gold has become more complicated over the past two years. Numerous factors based around the geopolitical fallout over the Russia/Ukraine war have increased demand for gold, additionally economic weakness in China has also pushed investors into gold.”

Schroders went on to note that “the case for owning gold as a diversified source of returns in a multi-asset portfolio remains highly persuasive. Whilst the events of the past two years mean we cannot reliably see gold as a hedge to other asset classes, the precious metal has proven to produce strong returns which are somewhat uncorrelated to other markets. That in itself produces a strong case for allocating to gold within a multi-asset framework.”

Turns out gold is still a safe haven
Late September will mark the two-year anniversary of a momentous headline for the precious metal market carried by none other than the Wall Street Journal.

Gold, which at the time was suffering a price correction that had seen a troy ounce trading down toward the USD $1,600oz price point, and was seeing huge outflows from products like gold ETFs, was in effect declared useless as a store of value, with Journal stating the precious metal had lost its safe haven status (see image below).

The fact that gold prices were falling back then, despite at the time near record inflation (headline in the CPI topped 9% in the middle of 2022), coupled with a US Federal Reserve that was in the midst of an aggressive rate hiking cycle was enough to see a large segment of the investment community turn their back on the precious metal.

As is often the case, such extreme market headlines often coincide with important turning points, with the corrective cycle in gold ending, and the market bottoming out in that very month.
Gold has gone on to rally by almost USD $900oz, a return of more than 50%, in the two years since.

Chart of the Week
This week’s chart comes from the Schroder report that we referenced earlier in this market update. It shows the correlation between the USD gold price (blue line) and real yields (green line), as measured by 5-year Treasury Inflation Protected Securities (TIPS), and how this relationship broke down post 2022.

In brief, up until 2022, there was a strong negative relationship between real yields and gold, which meant the lower real yields, the better the gold price did and vice versa.

That ended in mid-2022, with gold prices continuing to prosper, despite the fact real yields have surged, which in theory should have been bearish gold given it increases the opportunity cost of holding a non-income producing asset.
Schroders noted that there are several factors (all of which are intertwined) that have driven this changed relationship, including:

• Commencement of hostilities between Russia and Ukraine

• Sanctions on Russian assets by the US government

• Heightened sensitivity around holding foreign reserves in US dollars.

• Record levels of central bank gold buying

These sensitivities and geopolitical realities are likely to remain factors impacting economic activity and markets for many years to come, with gold set to be a continued beneficiary in this environment.

Inside the Office
Turnover across precious metals has remained at elevated levels in the past five trading days at ABC Bullion, as clients take advantage of the stability in prices to add gold and silver to their portfolios.
Recent jitters in equity markets, combined with slowing growth and the expectation of interest rate cuts in the United States are all factors driving the recent spike in demand, with data showing central banks continue to acquire gold at near record levels only encouraging private investors to do the same.

On the silver side of things, we continue to see huge demand for our signature cast bar range, with our current promotion on 5 kilo ABC Bullion silver cast bar products, which are available for as little as $200 per bar (or $40 per kilo) above spot proving particularly popular.

We are also seeing continued demand for our Untamed Landscapes silver coins, most notably the 1oz Crocodile Blister Pack, with these limited mintage products by far the most popular silver coin by sales volumes throughout August and early September.

Jordan Eliseo
General Manager
ABC Bullion Australia

Disclaimer: This document has been prepared by Australian Bullion Company (NSW) Pty Limited (ABN 82 002 858 602) (ABC). The information contained in this document or internet related link (collectively, Document) is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence any person in making a decision in relation to any precious metal or related product. To the extent that any advice is provided in this Document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of any precious metal or related product, you should obtain independent professional advice before making any decision about whether to acquire it. Although the information and opinions contained in this document are based on sources, we believe to be reliable, to the extent permitted by law, ABC and its associated entities do not warrant, represent or guarantee, expressly or impliedly, that the information contained in this document is accurate, complete, reliable or current. The information is subject to change without notice, and we are under no obligation to update it. Past performance is not a reliable indicator of future performance. If you intend to rely on the information, you should independently verify and assess the accuracy and completeness and obtain professional advice regarding its suitability for your Personal Circumstances. To the extent possible, ABC, its associated entities, and any of its or their officers, employees and agents accepts no liability for any loss or damage relating to any use or reliance on the information in this document. It is intended for the use of ABC clients and may not be distributed or reproduced without consent. © Australian Bullion Company (NSW) Pty Limited 2020.