Go for gold: The time is now

In this week's market update:

• Precious metal prices eased in the past week, with gold -1% to USD $2,025 per troy ounce (oz), while silver was -2%, last trading at USD $22.70oz.

• The softer start to the year combined with the easing in silver over the past month has seen the gold to silver ratio rise to eighty-nine, suggesting silver remains deeply undervalued.

• Equity markets were positive in the United States, with the S&P 500 +2% over the past five trading days.

• Bond yields rose, with both US and Australian 10-year government bonds now back above 4%.

Steady as she goes!
Gold and precious metal prices eased this week, falling by 1% and 2% respectively in USD terms. The price action is a continuation of a corrective or steadying period that dates back a month, after both metals moved sharply higher in Q4 of last year.

As we look forward, there remains no shortage of catalysts for higher precious metal prices, including just released inflation data out of the United States, which shows consumer price rises are accelerating, with core inflation remaining close to 4% on an annualized basis.

In the news

• Scepticism about the outlook for gold (which is a good thing to see from a contrarian perspective) abounds, with SocGen stating they don’t see any immediate catalyst for higher precious metal prices.

• World Gold Council data suggests gold ETFs continued to shed holdings in December 2023, with holdings down 7% for the year.

• China continues to build its nation state gold holdings, adding another 9 tonnes to their reserves.

• Famed precious metal money manger Sprott sees multiple catalysts for gold in 2024.

• Financial conditions continue to ease at the most rapid rate in the past forty years, as evidenced by the chart below from Bank of America that displays rolling 2-month movements in the US Financial Conditions Index from the early 1980s through to today.

Finally, it need be noted that after years of trying, Bitcoin ETFs in the United States are now set to become reality, with the Securities and Exchange Commission in the United States approving a raft of Bitcoin ETFs to be listed in the US.

Despite the hysteria, history suggest a moment like this could coincide with a top for the cryptocurrency. It may turn out to be very bullish for gold too.

Ten reasons to buy bullion this year
In the first week of January, ABC Bullion published a detailed article outlining ten key reasons why investors may wish to look at adding bullion to their portfolio in 2024.

Those reasons, with a brief explanation, are as follows:

• Momentum – winners keep winning: Gold rose again last year, increasing by more than 10% in USD terms. Momentum matters, with the path of least resistance to the upside.

• Silver is cheap relative to gold: In past periods, you have needed barely thirty ounces of silver to afford one ounce of gold. Today you need more than eighty. That suggests silver could outperform gold significantly.

• Interest rates are set to fall: Lower interest rates lower the opportunity cost of owning gold. With rate cuts on the agenda across the developed world in 2024, a tailwind for higher precious metal prices is on its way.

• Recession risk and a falling AUD: Despite the fact the world enjoyed reasonable growth in 2023, risks abound, with economic output set to stagnate. That is typically bad for the Australian dollar, which can boost gold for local investors.

• Central banks to keep buying: Nation states have accumulated vast sums of gold in the past fifteen years, buying more than 5,000 tonnes. They will likely add another 400 to 500 tonnes minimum this year.

• ETF holders to re-enter market: Gold ETF investors have shunned gold in the last three years. This part of the market moves in cycles. The next leg in that cycle is likely to be investors adding to their gold ETF holdings. History suggests that is bullish.

• Speculators to add to their positions: Speculative investors largely abandoned gold in the last couple of years. There are signs they will soon get back involved on the long side of the market, adding upside price pressure.

• Expensive share markets at risk of falling: Gold is a great diversifier, having traditionally been the best performing single asset class when share markets fall. Given valuations, excess froth (or greed) in share markets, and the cloudy economic outlook, a major pullback in the market would not surprise. If it happens, gold will likely benefit.

• Inflation still a problem: Inflation is no longer at nosebleed levels near to 10% per annum as it was 18 months ago or so. But it is still way above levels that consumers and households can deal with. Investors seeking a hedge against it may turn to gold, as they have in the past.

• Geopolitical risks: Finally, the geopolitical outlook remains sadly fraught. Any escalation in tensions in any number of geopolitical hotspots around the globe could ignite a safe haven bid.

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 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.