Central banks stockpile gold as market ignores Fed!

In this week's market update:

• Precious metal prices eased this week, with gold and silver both off 1% in USD terms.

• Local currency prices also fell, with the Australian dollar continuing to rally, with AUD gold now back below $2,700 per troy ounce (oz).

• Equity markets rallied, with financial conditions easing, despite an expected rate hike by the US Federal Reserve.

• Commodities were weak across the board, with oil down 6% for the week, while bond yields and breakeven inflation rates also continue to ease.

• Despite the pullback in gold prices, the outlook for gold remains strong, with demand at its highest level in a decade, driven by a 55-year in central bank gold buying.

Multi-decade high for gold demand

Precious metal prices pulled back sharply overnight, putting gold and silver in negative territory for the week, with both falling by 1% in USD terms.

The pullback occurred despite extremely robust demand for gold in particular, with the World Gold Council’s recently released Gold Demand Trends report for Q4 2022 highlighting that last year saw the highest level of gold demand in a decade.

Coming in at more than 4,700 tonnes, demand across the entire gold market was up almost 20% year on year, led by central banks, who collectively added more than 1,100 tonnes of the precious metal to their reserve holdings.

Commenting on this phenomenon in an article in the Financial Times, Krishan Gopaul, senior analyst at the WGC, noted that “colossal” central bank buying is a “huge positive for the gold market”, with Gopaul going on to note that; “Since 2010 central banks have been net purchasers of gold following two decades of net sales. What we have seen recently in this environment is central banks have accelerated their purchases to a multi-decade high,” he said.

The chart below, which comes the Financial Times article, highlights just how significant the buying from central banks was in 2022 relative to previous years, with annual demand figures from the 1950s onward plotted.

Very clearly, the Global Financial Crisis was a game changer in terms of the official sectors view on the value of holding gold, with more than 5,000 tonnes of gold added to reserves since then, with the pandemic, and recent geopolitical concerns only adding to the appeal of gold.

The strong buying is one factor that has made a range of banks and forecasters more optimistic in their outlook for the gold price, including UBS, who recently raised their year-end target for gold to USD $2,100 oz, up from $1,850 oz previously.

While the overall demand picture for gold is clearly robust, there continue to be pockets of weakness, most notably in the ETF market, where there were continued outflows (-110 tonnes), while jewellery demand was also softer in 2022, primarily driven by a 15% drop in China, which was heavily influenced by the continued attempts to curb the spread of COVID-19.

Tighter monetary policy is also a factor to watch, with the US Federal Reserve delivering a widely anticipated interest rate hike earlier this week, the eight time they’ve hiked rates since March last year, with the target range in the United States now sitting at 4.5%-4.75%.

They Fed also reaffirmed that further rate hikes will be needed, though on this front, markets remain sceptical, with current pricing suggesting that not only are we are at/near the peak in interest rates, but that the Fed will begin to cut rates later this year.

Indeed, for all the actual rate hikes that we’ve seen in the last year, and the Fed’s tough talk on inflation, financial conditions themselves are now easier than they were the better part of a year ago, when actual policy rates began to tighten.

This easing in financial conditions, especially in the last quarter of 2022, has no doubt been a major factor supporting gold in recent times, and can be expected to continue to do so when (or should we say if), the Fed does indeed switch to a more dovish posture.

Inflation rates, while easing at a headline and core level, could also be a source of support for gold going forward, especially if the disinflation that we saw in energy prices (as per this update from Cameron Dawson, in 2H22, Oil prices went from a peak of $122/barrel in June to $71 in December, while gasoline prices fell from a peak of $5.00/gallon in June to $3.10 in December) stabilises across the course of this year, with other contributors to inflation, most notably the services sector, continuing to look problematic.

Could gold pullback despite the tailwinds?

While the long-term bull case for gold, and the important role it can play in a portfolio are only reinforced by recent demand trends, and the broader macroeconomic environment, the price does not go up in a straight line, with the market potentially set up for a pullback, or continued consolidation in the next few weeks.

Indeed you could argue this is already happening, and was evident in last night’s price action, where gold fell by almost $50 (seen in the chart below), more than wiping out gains from earlier in the week.

Commentators like SaxoBanks Ole Hansen have warned of the likelihood of such a correction, with a 28th January update from his team noting that

Given gold’s steep ascent during the past two months which has seen it rally some $330 above the November low, the need for a period of consolidation is long overdue. Whether it is consolidation or correction will depend on the yellow metal’s ability to hold trendline and the 21-day moving average both currently around $1890.

The potential for short-term consolidation was something we discussed with Jaspar Crawley, the World Gold Council’s Head of Institutional Investor Relationships in the Asia Pacific-ex China, who noted that while the strategic and portfolio case for gold remains robust, there are some potential headwinds for gold now, including:

• The fact the price has rallied so far so fast, with gold up circa 20% in USD terms since the 2022 low. Indeed, gold is now close to USD $100 per ounce above its 200-day moving average even after the overnight pullback.

• Speculative positioning. While it remains a long-way short of the exuberant levels that we’ve seen in the past, it has built over the past month, with this segment of the market notoriously fickle, and likely to sell gold on any price weakness.

• ETF demand, or lack thereof right now, with almost no buying interest coming from this sector, even though prices have bounced so hard in the past two months.

• The potential for a bounce in the USD, which has fallen by the better part of 10% in the last three months after a monster rally in the preceding year.

While a continuation of a pullback that in essence began last night can’t be ruled out, we’d note that for Australian dollar investors, it is likely to be modest, given any increase in the value of the USD supports the AUD gold price.

Even more importantly, it would most likely be a buying opportunity, with the price set up such that even a USD $50oz – USD $70z decline from current levels wouldn’t change the overall bullish set-up for precious metals right now.

That’s not price prediction per se, but rather important context to keep in mind when monitoring day to day price swings in this space.

Inside the office this week

Clients continue to add to their precious metal positions, with a strong uptick in new accounts being created, with many of these customers investing in pool allocated metals, and ABC Bullion cast gold and silver bars.

Inside our offices, 1kg ABC Bullion silver cast bars, a range of silver coins, and 50-gram ABC Bullion gold cast bars continue to be popular choices for investors.

Online, we’ve also had lots of customers activate ABC Bullion Gold Saver accounts, no doubt in part due to the current promotion we are running (which will end on February 15), that will see one lucky winner have $1,000 worth of gold added to their gold saver account.

The ABC Bullion 1kg Silver Cast Bar.

Warm Regards,

Jordan Eliseo
General Manager

ABC Bullion Australia

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