Boredom and Bull Markets

In this week's market update:

• Gold prices rallied this week, the precious metal climbing by 1% in USD terms to $1,919.80 per troy ounce (oz).

• Silver was even stronger, +3% to USD $23.40oz, with the gold to silver ratio (GSR) declining to 82.

• Equity markets were weaker, with the S&P 500 -4%, while in Australia, the ASX 200 is -2%, while a basket of commodities saw a similar decline, with oil easing back below USD $90 per barrel.

• Bond markets continued to sell off violently, with yields on 10-year US treasuries approaching 4.5%, while real yields are now above 2%, having more than doubled in the past twelve months.

• At a portfolio level, precious metals continue to prove their worth, outperforming longer-term bonds and either matching or exceeding equity market returns, especially in Australian dollar terms with weakness in the AUD magnifying gains for local investors.

Gold stares down Fed and higher yields

Precious metal markets rallied this week, ignoring both a spike in bond yields that saw two-year US treasuries hit a near two decade high above 5% and warnings from the US Federal Reserve that rates will likely increase again before the end of the year.

Silver was the leader, rising by 3% to USD $23.40oz, while gold was +1% to USD $1,919.80oz, with the gold to silver ratio (GSR) falling to 82.

This decline in the GSR has some sectors of the precious metal community excited, as chart data (see below) suggests the ratio may be on the verge of breaking down.

Given a decline in the GSR means silver would be outperforming gold, a potential breakdown in this chart would be highly encouraging, as silver outperformance is expected in precious metal bull markets.

The weakness creeping back into equity markets, overconfidence regarding a soft landing in the United States, and the continued sell off in other supposed safe havens like treasuries also bode well for precious metals, in particular gold, given its high liquidity, diversification qualities, and lack of credit risk.

Boring is good!

One of the factors that we have commented on when it comes to the performance of gold this year is the stealth like nature in which it has performed.

Despite the spike in yields that we’ve seen, stronger than expected growth, a resilient stock market, and a meaningful fall in headline inflation rates, all of which are headwinds for precious metals, gold is up by close to 6% in USD terms in 2023, with even stronger performance in a range of currencies. This includes Australian dollars, where gold is again trading above AUD $3,000oz, essentially in line with its all-time high.

You wouldn’t know it though from the lack of media interest in gold right now, and the more subdued investment demand we see for precious metals globally, expressed most notably through YTD outflows for gold ETFs, and extremely modest positioning in the gold futures market.

Indeed, so quiet is the gold market right now that Bloomberg recently published an article titled; “Gold trading hasn’t been this boring since the pandemic began”, which noted the complete lack of volatility in the asset today.

This is a complete contrast to 2011, when gold first traded above USD $1,900z, with that period characterized by.

• A 10-year bull market in gold that saw prices rise by almost 500%, while silver had rallied by closer to 1,000% in USD terms.

• Significant outperformance relative to equity markets.

• Strong inflows into gold products like ETFs and the gold futures market.

• A wave of media stories and attention dedicated toward precious metals, as the implementation of zero-interest rate policies (ZIRP) and Quantitative Easing (QE) in the aftermath of the Global Financial Crisis raised fears of imminent hyperinflation.

Those fears of course never materialized, with official inflation figures failing to get much above 2% per annum until more than a decade later, in the aftermath of the COVID pandemic.
That lack of follow through as regards inflation was a big part of the reason why gold ended up going through a bear market between late 2011 and late 2015 in USD terms, though of course prices have risen by more than 80% since bottoming out at close to USD $1,050oz in that corrective cycle.
This time around, despite the fact the gold price is again knocking on USD $2,000oz, there is no widespread media attention, nor the kind of froth that was evident in the gold market back in 2011.

That relative boredom is a very good thing going forward and suggests prices may have much further to rally once the headwinds from higher yields and a resurgent USD dissipate.
Indeed, if gold can get back above USD $2,050oz, we expect investor sentiment towards precious metals will no longer remain in its current state of apathy. Instead, we’ll likely see investors again turn very bullish on both gold and silver, which will help propel the metals even higher.

The Pod of Gold

My colleague Nicholas Frappell has just released another must listen Pod of Gold, with the episode recorded on 19th September. As usual, Nick covers a lot of ground in his most recent episode, with the podcast looking at the latest developments in the precious metal market, including gold’s recent bounce from just over USD $1,900oz, and the implications that have for the market.

Other areas discussed, and their timestamps are below, with the section on silver no doubt of particular interest to many of our clients at ABC Bullion who treat silver as their go to precious metal in their portfolio.

Timestamps:

4:05 – Au trapped ahead of two major central bank meetings this week.
9:01 – Key price targets for gold
11:57 – Silver: The industrial metal with constrained supply
16:41 – Managed Money is neutral on silver.
18:20 – Has the US dollar rally played out?
22:33 – The cost of defending the Yuan.
26:35 – Negative carry trade drives selling of US 10yr Treasuries

Inside the office this week
 
Trading volumes for physical bars and coins remain at robust levels at ABC Bullion, with gold’s recent pushback above AUD $3,000oz encouraging investors to add to their holdings or allocate money to bullion for the first time.
 
As always, it’s our signature 1oz ABC Bullion gold cast bar that sees a lot of this demand.
 
We are also seeing a renewed push into silver, in part driven by how historically cheap it looks relative to gold, with the gold to silver ratio still sitting above 80.
 
This is being seen most obviously through SMSF trustees and high net worth investors, most of whom allocate to ABC Bullion silver cast bars, including our 1 kilo ABC Bullion and 5 kilo ABC Bullion silver cast bars.
 
Buybacks also remain at healthy levels, with near all-time highs in gold, coupled with its exceptional liquidity encouraging some clients to lighten their exposure.
 
Silver coins also continue to trade well, with ABC Bullion 1oz Eureka silver coins by far the most popular, while for younger Australian clients, we continue to see a strong appetite for ABC Bullion Gold Saver accounts, with the low entry point ($50 a month is all you need to use this product) particularly attractive for those at the beginning of their wealth creation journey.

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