Bargain hunters emerge as precious metals fall

In this week's market update:

• Precious metal markets sold off sharply this week, with the price of gold and silver down by 2% (gold) and 5% (silver) in USD terms.

• Gold last traded at USD $2,303 per troy ounce (oz), while silver sits at USD $28.90oz, with the gold to silver ratio climbing back to 80.

• Equity markets were mixed, with the S&P 500 climbing by 2%, while in Australia the ASX 200 is -1%, having fallen back below 7,750 points.

• Commodity markets were mixed, with an overall basket falling by 1%, with oil bucking the trend, +3% to USD $78.30 per barrel.

• Bitcoin was also softer, falling by 5% and now back below USD $67,000 per coin.

• Bond yields also continued to ease, with 10-year yields in both Australia and the United States now sitting near 4.20%.

Precious metals sell off
Precious metal markets sold off sharply this week, with the price of gold and silver down 2% and 5% respectively in USD terms. The weakness in the market has been driven a range of factors, with sentiment taking a big hit when it was revealed late last week that [China had not made any gold purchases in May](https://www.businessinsider.com/gold-price-expensive-china-central-bank-stopped-buying-spot-pboc-2024-6#:~:text=China's central bank has paused,softened from a record high.), bringing to a halt an 18 month straight period where they had been adding to their holdings.

World Gold Council CEO David Tait commented on this at this week’s Asia Pacific Precious Metal Conference in Singapore, noting that “China’s data did show a pause, (but) they are just waiting and watching. If prices correct to the $2,200 per ounce level, they will resume.”

In other gold related news this week:

• There are signs we are approaching ‘peak gold’ with mine production likely to stabilise, then fall away in years to come. While this will do nothing to the existing stock of more than 200,000 tonnes of gold (with a value of almost USD $15 trillion) that already exists, it does help highlight the scarce, and more importantly, stable, overall supply of gold, which is it part of its value appeal. John Reade of the World Gold Council commented on these trends recently, noting that “I think the overwhelming story there is after 10 years of rapid growth from around 2008, the mining industry is struggling to report sustained growth in production. It is getting harder to find gold, permit it, finance it, and operate it.”

• James Steel, Chief Commodities Analyst at HSBC, recently appeared on Bloomberg TV, looking at how geopolitics can impact the gold market, as well as how price fluctuations impact retail sales in the precious metal market globally. He also talked about how gold is a “sweet spot” asset for central banks that may want to lighten up on dollar exposure, noting they are limited in which types of assets they can hold in their reserves.

• Four central banks have committed to signing ‘The London Principles’, a set of operating principles to help structure and formalise central bank artisanal and small-scale gold mining (AGSM) domestic purchase programmes. Estimates suggest upwards of 15 million people worldwide make their living through AGSM, with these developments an opportunity to help bring part of this production into the formal gold supply chain.

Finally, it seems that the recent price correction has done little to dampen the enthusiasm of the more bullish forecasters looking at the precious metal market. Bank of America for one are bullish on silver, with Metal Strategist Michael Widmar seeing silver rise to an average price of USD $35oz in 2026. They also see gold hitting USD $3,000oz by 2025.

Citi analysts share the enthusiasm for gold, also predicting a USD $3,000oz gold price within the next 12 months, citing a range of factors quoted in this article that noted “the market’s asymmetric risk skew has already demonstrated resilience, with gold prices rallying to $2,400 per ounce despite a strong US dollar, high interest rates, and robust equity markets.

“A negative turn in US growth exceptionalism should be positive for gold, enhancing bids for duration and haven assets, all-else equal.” Citi also sees the risk “skewed towards weaker growth and lower yields. US election uncertainty and a potential ‘red sweep’ would likely bloat fiscal deficits and boost term premia, enhancing spec gold demand for alt-fiat.”

The article also noted a “prospect of peak interest rates also supports this optimistic forecast. An easing cycle from the Federal Reserve, combined with a rally in Treasury markets, is expected to be a significant bullish factor for gold. Citi’s economists foresee a US recession later in the second half of 2024, which could catalyze lower yields and higher gold prices. Moreover, official sector gold demand remains robust. Emerging market central banks, in particular, have been significant buyers of gold, a trend that is expected to continue.”

Chart of the week
I was honoured to be asked to speak at this week’s Asia Pacific Precious Metals Conference, which was held at the Shangri-La Hotel in Singapore.

The title of my talk was “Australia’s Role in Shaping up the Asia Pacific Precious Metal Market”, which I addressed by looking not only at Australia’s role in exporting gold to Asia, and why that is a growing market (assisted by favourable regulations, quality supply chains and logistical ease), but also by looking at Australia’s role as a consumer of gold.

Diversification is a key part of the reason Australian investors allocate to gold, with gold’s ability to help protect portfolios of particular value in Australia, given.

1. Gold is a ‘risk off’ asset that tends to thrive in periods of uncertainty.

2. The Australian dollar is a ‘risk on’ asset that tends to suffer in periods of uncertainty.

Those characteristics have historically meant that while gold has performed well in USD terms in periods markets have sold off, it has performed even better in AUD terms.
This can be seen in the chart below, which looks at the performance of both USD and AUD priced gold in some of the most important ‘risk off’ moments of the past twenty-five years.

Source: ABC Bullion, World Gold Council

As you can see, gold in AUD has substantially outperformed, with an average return of close to 20% across all these periods.

Inside the Office
Volatility begets turnover in the precious metal industry, with recent oscillations in gold and silver markets bringing out both buyers and sellers. We are seeing this across all our investment mediums, with online turnover particularly brisk, as clients take advantage of the movements in metal prices that we often see in overnight (Australian time) trade.

This is typically led by purchases and sales of pool allocated metals, which are particularly attractive to clients considering they are:

• Cost effective, with the lowest trading premiums of all products.

• Able to be bought and sold in fixed dollar values.

• Have no storage costs.

We are also seeing continued demand for lower denomination gold and silver products, including our signature 1oz ABC Bullion gold cast bar, and 10oz ABC Bullion silver cast bars, with investors increasingly gravitating toward these products given the greater trade (or liquidation) flexibility that they offer.

With bargain hunters taking advantage of the recent price correction, we expect demand for these products to remain at robust levels going forward.

Until next time

Jordan Eliseo
General Manager
ABC Bullion Australia

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