Gold and silver pullback amidst market sell off

In this week's market update:

• Precious metal prices fell this week, as a spike in volatility led to selloffs across global markets, with some assets seeing their largest declines since the 1980s.

• In USD terms, gold fell by 1%, last trading at USD $2,427 per troy ounce (oz), while silver fell by 3% to USD $27.50 (oz), with the gold to silver ratio climbing to 88.

• Returns were similar for local investors, with AUD gold last trading just above AUD $3,700oz, while silver is at AUD $42oz.

• Equity markets were hit hard, led by the Nikkei in Japan which experienced one of its largest falls in decades. The S&P 500 (-2%) and ASX 200 (-5%) also came under selling pressure.

• Bitcoin investors saw the value of their holdings crumble too, though many will have been seasoned by prior periods of extreme volatility, which is far more common in crypto than in mainstream asset classes.

• Oil and the broader commodity complex were resilient, holding up despite the market sell off, while bond yields were largely unchanged over the full 5 days.

BOJ job causes chaos

Markets were whipsawed this week, with everything from cryptocurrencies to large cap equity market indices seeing some of their biggest crashes on record. The proximate cause of the spike in the volatility was the move by the Bank of Japan (BOJ) to both hike interest rates and decrease the amount of government bonds it would purchase going forward.

It is fair to say the decision caught markets off guard, with the Japanese Times reporting that; “the vast majority of analysts polled forecast that the central bank would remain dovish and leave rates unchanged until September or October in order to gather more data.”

While it was no doubt unintended, the decision by the BOJ led to chaos across markets, with the Nikkei experiencing its biggest one-day crash since 1987, falling by 12%, though it has since recovered, with other large cap equity indices also suffering some of their largest falls of recent times.

Cryptocurrency markets and other high beta investments, including market darling NVIDIA, were also caught up in the chaos, with Bitcoin at one point falling below USD $50,000 per coin, while NVIDIA has shed 19% of its value in the last month.

Gold and silver were also caught up in the sell off, as often happens in extreme risk off periods, as their exceptional liquidity makes them one of the few assets that can easily be sold.
That said, declines of 1% (for gold) and 3% for (for silver), like we have seen in the past five trading days are not unusual in the early part of a spike in market volatility, as the exceptional liquidity makes of precious metals makes them an asset class that can easily be converted into cash, something that is particularly attractive for institutional investors, leveraged speculators and hedge funds.

A similar scenario occurred when the Global Financial Crisis hit fifteen years again. Both gold and silver would go on to roar higher in the years that followed.

Given the events of the past week, we are more convinced than ever that precious metals remain a sensible place to allocate a portion of a portfolio too, with sales activity across the bullion world suggesting this sentiment is shared by investors globally.

For if history is any guide, the recent pullback that we have seen in gold and silver is likely to be short-lived. To that end, it has been pleasing to see so many investors treat it as a buying opportunity, with situations like the one we see unfolding across markets today reminiscent of the early phase of previous precious metal bull markets.

Chart of the Week

While gold has many of their own drivers, it never hurts to look at signals from other markets, be they commodities, equities, or fixed income.

The chart below looks at the USD gold price since the year 2000 and shows the spread between 10-year US treasury bonds and 2-year US treasury bonds.

The spread is calculated by looking at the differential between the yield on these two bond types, so if for example a 10-year bond is yielding 5% and a 2-year bond is yielding 3%, then the spread will be 2% (5%-3%).

Typically, the spread is positive, which is another way of saying that typically, 10-year bonds have higher yields than 2-year bonds, which is logical for a number of reasons including the higher inflation risk that is embedded in a longer dated bond. This is visible in the chart below, with the orange line typically above zero.

Source: World Gold Council, St Louis Federal Reserve, ABC Bullion

There are however times when this spread inverts, meaning shorter-term bonds have higher yields than longer term bonds. This often occurs during periods of heightened economic uncertainty and or crises.

These periods also often coincide with the beginning of a sustained upwards move in bullion prices, as the chart also highlights.

For example, back in 2000 the yield curve inverted. That coincided with the beginning of the secular bull market in gold, with the precious metal trading for less than USD $300oz back then.

The yield curve inverted again around the middle of 2006. In the five years that followed, gold would go on to rally by almost 150%, with a strong move to the upside also seen in the aftermath of its most recent inversion, which was around 2019.

Gains of such magnitude will be extremely difficult to come by in any other asset class in the years ahead, let alone one that offers the history, the liquidity, and the safety that precious metals are renowned for.

Inside the Office

The launch of the ABC Bullion Untamed Landscapes range has caused quite the stir amongst precious metal investors, with silver aficionados snapping up the Crocodile coins, which are the first release in this five-coin series that celebrates the rich fauna of Oceania.

Pleasingly, we have seen a large number of clients not only buy the Crocodile, but all five coins in the series, which includes the Kiwi, the Thorny Lizard, the Kangaroo, and the Sailfish.
Silver coins have of course been a long-favoured way of getting exposure to precious metals, with their exceptional liquidity and low-cost nature making them a natural choice for many investors.

On the gold side, we are also seeing a surge in buying, with investors continuing to gravitate toward lower denomination product. This is most notably seen through demand for our signature 1oz ABC Bullion gold cast bar, which is a favourite amongst most clients at ABC Bullion, even when their total investment into precious metals would allow them to buy larger bars, up to and including the 1-kilo ABC Bullion gold cast bar.

Pool allocated metals also remain in favour, especially for SMSF trustees and HNW investors who value the trade flexibility which allows for streamlined portfolio rebalancing, as well as their divisibility into fractions of ounces, which facilitates fixed dollar investments.

Jordan Eliseo
General Manager
ABC Bullion Australia

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