Breather or breakout – where to next for gold?

In this week's market update:

• Gold prices stabilised this week, with the precious metal last trading just below USD $2,000 per troy ounce (oz).

• Silver continued its recent rally, up 4% in USD terms to UDS $23.80 oz, with the gold to silver ratio continuing to fall, having decreased from 88 to 83 in the last month.

• Risk assets rallied this week, as fears over a potential escalation in the northern hemisphere banking crisis abated, for now at least, with equities up 2-3% in Australia and North America.

• Commodities were also bid, with oil up 6% and now back near USD $75 per barrel.

• Bond yields rose, with the Fed continuing to hike policy rates, despite signs of a slowdown in economic activity, with inflation still at uncomfortably high levels.

• Bullion demand remains incredibly robust, as investor continue to gravitate toward tangible safe-haven assets.

Recession, rate hikes and bullion demand
Precious metal prices ended the week largely unchanged, with gold last trading just below USD $2,000oz, while silver continued to rally, and is now sitting just below USD $24oz.

While gold was flat over the period, it did experience choppy trade throughout the week, with the precious metal at one point threatening to break below USD $1,950oz.

That pullback was temporary, or at least has proved to be so far, with the precious metal well bid at those levels, with the potential for a strong close heading into the week, month and quarter end that could see gold finish above USD $2,000oz.

Safe haven buying is obviously a continued factor supporting gold, as is the return of some investment from the ETF side of the gold market, which has been largely absent, and indeed a net negative for gold demand for some time.

These factors are reinforcing a bullish outlook for gold, with UBS noting that gold could hit its March 2024 price target of USD $2,100 oz earlier than expected. Specifically, UBS analysts noted; “Gold has already been gaining due to the recent market volatility. The spot price broke above $2,000 an ounce to hit a 12-month high. Meanwhile, Gold exchange traded funds look set to post net inflows in March for the first time in almost a year. Given recent events, we think there’s a chance that gold prices will reach our end-March 2024 target of $2,100 earlier than expected. While a repeat of the global financial crisis appears to have been averted, we think it will take time for investor confidence to be fully restored.”

While the recent banking crisis that was kickstarted by the collapse of Silicon Valley Bank has been the primary driver of gold’s recent bounce, and surge in demand, there are other potential tailwinds (many of which are interlinked) for bullion going forward.

The first of these is the likelihood of a global recession, or something close to one, appearing at some point by late 2023. As @CallumThomas, the Founder and Head of Research at Top Down Charts noted in his regular publication, “All leading indicators continue to point to recession, and there has been nothing to negate or confound that signal. If anything, the banking crises only raise the prospect and proximity of a steep global economic recession.

The chart below, shared by Thomas, highlights this clearly, with leading indicators of economic activity all pointing to a sharp slowdown.

The likelihood of a recession has only been exacerbated by the recent banking crisis, with credit conditions tightening, retail sales in real terms suffering, and consumer confidence also taking a hit.

Inevitably, this will lead to a policy response. That could be both fiscal, in terms of more stimulus from government, and on the monetary side, with central banks likely to halt rate hikes, even though inflation will likely remain well above target levels of 2-3% per annum for some time.

Precious metals are set to be a major beneficiary of these developments. This will likely include much higher levels of demand, especially for physical gold and silver given the growing appetite for tangible wealth.

It will also likely include bullish price action, with gold and silver potentially set to outperform traditional assets in a period of slower growth and higher inflation.

The Pod of Gold!

My colleague Nicholas Frappell, Global Head of Institutional Markets for ABC Refinery, appeared in another edition of his regular podcast, The Pod of Gold, earlier this week, and had a timely discussion on all things precious metal related.

Some of the key points that came from the podcast, and which can be ascertained from looking at various market date points include:

• That gold, despite the surge toward USD $2,000 oz in the last three weeks, is hardly a crowded trade right now, which implies the market could have further to run.

• That positioning in the gold futures market remains historically light, with the net positioning still below historical averages seen between June 2006 and today. The data more than validates this view, with long positioning less than half of what it was in 2020.

• That the increase in positioning of late has been driven by both fresh managed money longs (those betting the gold price will rise) and a reduction in gross longs (those betting the gold price will fall).

• That positioning in gold ETFs, while increasing somewhat of late, remains very light on. Indeed, in discussion’s we’ve had across the industry, we’ve noted that some products have seen outflows on recent price strength.

• That the Fed, despite recent stresses in the financial system, had no choice but to keep raising interest rates, less it spooks markets. Despite this, there has clearly been a major re-assessment of the pathway for monetary policy, with significant rate cuts now expected. As Nick points out, the banking sector, and the economy more broadly now face a scenario of rapidly reduced liquidity on one level, but also the natural tightening of financial conditions as the banking sector both responds to stress and the need to bid up for deposits.

• That bank stress appears to be easing somewhat, even if just for now, as markets have time to digest what is going on. Ultimately, Credit Suisse was taken over by UBS at the behest of the Swiss government so it was an orderly resolution. Other smaller banks are atypical, and not necessarily representative of wider stress as yet, though we’d note there is a clear rotation from small to large banks in terms of deposit flow. That is evidenced in this WSJ article, and graph below, which shows the change in deposits from one week to the next at large banks vs big banks.

Two other subjects from the podcast that will be of interest to ABC Bullion customers are the Australian dollar (AUD), and silver.

On silver, Nick noted that the primary driver of managed money buying was short covering. Those short silver were probably reflecting a position driven by weaker demand expectations in 2023 combined with concerns over recession or some kind of slowdown. However, with metals rallying, and silver following gold higher, some of these shorts were squeezed out.

On the AUD, Nick noted he expected it to remain under pressure short-term, with markets continuing to fixate on the post bank shock slowdown and concerns that the Chinese economic re-opening may not that strong.

Next week’s RBA decision will of course be critical in terms of local currency moves. Despite expectations bordering on pleas for them to halt rate hikes, the RBA will risk a serious hit to the currency if they allow the rate gap between Australia and the rest of the world to widen.

With inflation still uncomfortably high, our view is they will hike again, further denting consumer confidence, and adding to the financial stress mortgage holders are dealing with.

In the office this week
This week marks our second week of trade in the new ABC Bullion Global Flagship, located at 38 Martin Place.

While overall trade volumes across the business (which includes online and phone-based sales) have pared back a little from the record demand we saw in the previous fortnight, the number of clients visiting the ABC Bullion Global Flagship, as well as our state offices in Perth, Melbourne and Brisbane, continues to increase, with gold and silver highly sought after.
 
50-gram ABC Bullion gold cast bars, 10oz ABC Bullion silver cast bars and 1oz ABC Bullion gold cast bars have been amongst our most popular products, while we also continue to see healthy levels of buyback activity, with some clients liquidating part of their precious metal portfolio given near record precious metal prices.

Warm regards,

Jordan Eliseo
General Manager
ABC Bullion Australia

The ABC Bullion Team
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.