Central banks drive demand as gold steadies

In this week's market update…

• Gold prices steadied this week, after a brief foray above USD $2,000 troy ounce (oz), with the precious metal last trading at USD $1,983.

• Silver was softer, falling by 1% in USD terms after failing to hold the USD $23oz price point, with the gold to silver ratio (GSR) climbing to 87 over the past five trading days.

• Australian dollar precious metal prices saw a larger pullback, with gold and silver -2% (gold) and -3% (silver) respectively, driven by the 2% increase in the Australian dollar, which is now trading at USD $0.642.

• Equity markets were also in risk-on mode, with the S&P 500 +4% over the week, while in Australia the ASX 200 is +1%, with more gains expected when the market opens today.

• Cryptocurrency markets were also buoyed, with Bitcoin up another 3% on the week, and now approaching USD $35,000.

• Bond yields also fell with US 10-year treasuries declining by 18 basis points.

Gold will have its day

Gold prices were unchanged over the week, with the precious metal pulling back after a brief run above USD $2,000oz.

Markets continue to digest developments in the Middle East, as well as the outlook for monetary policy, where despite warnings of upside risks to inflation, and a relatively healthy US economy as measured by employment and output, the US Federal Reserve (the Fed) maintains a steady as she goes approach.

This was evidenced at their recent policy meeting where they decided to leave the federal funds rate unchanged in its current target range of 5.25-5.50%.

That is the second month the Fed has maintained policy settings, after previously engaging in a blistering series of rate hikes (11 in a row) aimed at getting inflation back to target.

Geopolitics, the outlook for rates and gold’s potential role as a global alternative asset will continue to impact the precious metal market, as per this [recent video from CME Group](file:///C:/Users/Downloads) looking at three factors expected to keep a floor under gold.

Short-term price action and momentum still appear to be favouring bulls, though a period of consolidation will be healthy for the market, with silver’s lack of follow through a warning sign, given it typically leads precious metal markets higher.

An investment in monetary disorder

One person who thinks gold will have its day in the sun going forward is James Grant of Grant’s Interest Rate Observer. Grant is one of the most respected market commentators and financial historians on Wall Street. He’s also unashamedly pro-gold, in that he is acutely aware of its historical role as a monetary asset and its continued role as a global reserve asset today.

He thinks the precious metal will shine (pun intended) in the next few years, especially if it turns out we are only in the early days of what may turn out to be a multi-decade bear market in bonds, or fixed income securities, with Grant noting that; “Bonds are unusual in the world of financial assets as their prices historically tend to tren__d in generation-length intervals; something we don’t see so much in stocks or commodities.”

Talking of gold more specifically, Grant said that he doesn’t think gold should trade as an inflation hedge, instead pointing out that it should trade as; “an investment in monetary disorder of which we surely have enough in the world. So, it’s a question of getting people interested in the problem, and then in the solution. If you want to go back and look at the long cycles, it might just be that the fifty odd years since the end of Bretton Woods and the end of the dollar’s convertibility to gold, that cycle is ending. It might be that paper money in the historians’ retro perspective views will seem to have been a failure and that the world is going to charge back on unconstrained central bank credit creation and unconstrained sovereign borrowing. Maybe, that’s one way to look at it. It’s the way I tend to look at these things: longer-term, historical trends – and fifty years in the history of money is about the blink of an eye.”

Central banks, who remain a key driver of gold demand (see section below), are obviously sympathetic to Grant’s views, with a recent OMFIF podcast, aptly titled; “The rise of a central bank reserve asset”, highlighting the critical role that gold plays to this day, especially for emerging market nations, who are the principal drivers of official gold demand.

Central Banks in the driver’s seat

The World Gold Council this week released it's latest Gold Demand Trends report, looking at demand across the main segments of the gold market in Q3 2023.

While certain segments of the market have seen a notable downturn (for example, German bar and coin demand is -73% year on year), or continued outflows (ETFs saw another 139 tonnes of outflows), the overall market remains robust, with demand above longer-term averages.

Central Banks remain key to that story, with over 335 tonnes of gold bought through this channel in the 3 months to September 2023, the third highest quarter on record.

The chart below, from the recent WGC report, highlights overall movements in demand, and the key subcomponents of demand (jewellery, central banks, ETFs, bar and coins, technology).

Some other insights (the below bullet points are direct extracts from the WGC report) included.

• The LBMA (PM) gold price averaged US$1,928.5/oz during Q3. Although 2