Gold and Struggling Safe Havens!

In this week's market update…

• Precious metal prices remained firmly in sell-off mode this week, with gold falling by 3% to USD $1,820 per troy ounce (oz).

• Silver was hit even harder, -7% over the same period and now trading back below USD $21oz, with the gold to silver ratio (GSR) back above 85.

• Equity markets also remain on the back foot, with the S&P 500 and ASX 200 both down another 1%.

• Commodities were also off, falling by 4%, led by a crash in the price of crude oil, which fell more than USD $8 per barrel (-10%) on concerns regarding the demand outlook.

• A continued rise in the USD, which is on track for its 11th straight weekly advance, and the seemingly unstoppable rise in bond yields were again the driver of general market weakness, with US 10-year treasuries now approaching 4.75%.

Gold deeply oversold!

Precious metal prices broke to the downside this week, with gold and silver falling by 3% and 7% respectively in USD terms. The weakness was driven by the continued spike in bond yields, which has combined with strength in the USD to see investors liquidating holdings of financial products linked to gold, including ETFs, with the world’s largest gold ETF seeing almost USD $1 billion in outflows over the last month, with that weakness carrying over into early October.

Liquidation in gold is also being seen in the futures market, where managed money speculators have almost certainly turned, or are on the verge of turning net short, with the latest available data from September 26th suggesting gross short positions were already extended at more than 90,000 contracts, while gross long positions were below 115,000.

Given gold is down a further USD $90oz since that data was published, we would not be surprised to see gross short positions almost matching, or potentially exceeding gross longs, a rare occurrence that has almost always coincided with the end of a correction for gold.

Further evidence of a likely bottom in gold is seen when looking at RSI data, and overlaying it with the gold price, as per the chart below from @TaviCosta of Crescat Capital.

As Tavi noted, the last time gold was this oversold was in 2018 when it was trading at USD $1,200oz. It would go on to rally by more than 60% in the two years to follow, a scenario that if repeated would see gold trading near USD $3,000oz by late 2025.

By contrast to the gold ETF and futures market, and perhaps with a view to the potential upside ahead, demand for physical gold amongst retail investors, which includes a segment of our client base at ABC Bullion, remains incredibly strong. The recent price dip has encouraged a notable increase in turnover, as we discuss at the end of this update.

The recent price weakness in gold has also clearly been no deterrent to central banks, with a recent World Gold Council article noting that demand from this sector of market was sizzling in August, with more than 75 tonnes of gold added to reserves in the month. This was up 38% on the month before, with the People’s Bank of China again leading the way.

So much for safe havens

Despite the threat of a global recession, the ongoing conflict in Ukraine, higher short-term interest rates and persistent inflation, 2023 has been a struggle for haven assets, at least relative to how many people would have expected them to perform given the above dynamics at play.

Part of that is simply down to the resilience of stock markets worldwide, which remain firmly in positive territory for the year, despite the correction they have been through over the last month, with the S&P 500 for example +11% YTD, despite falling almost 5% in the last month.

Gold and silver are obviously one such haven that are currently in corrective territory, with gold now looking to find its footing above USD $1,800oz, some $250oz or 10% below the all-time high it hit more than three years ago.

While that drawdown in gold may understandably be frustrating some investors, it needs to be considered alongside the almost unprecedented surge in real yields (evidenced in the chart below), which have risen by more than three hundred basis points, or 3%, in the last two years.

Given this context, one can make a great case that gold is doing an excellent job holding up at current price levels, with central bank buying and strong retail demand for bars and coins like the ones we manufacture and trade at ABC Bullion one obvious factor supporting the market.

By contrast, the haven that has well and truly failed in recent times is long-term government bonds. Arguably the most extreme example of how poorly these supposed safe haven bonds are faring is the now infamous Austrian century bond, which was issued back in 2020 with a coupon of 0.85%. Earlier this week, the yield on those bonds was now above 3%, with the price haven fallen by more than 65% in the past three years.

While that is an extreme example, long-term government bonds really have underperformed, with the chart below showing that these assets have now fallen by more in the last couple of years than the US equity market did at the height of the GFC more than 15 years ago.

As Callum Thomas of @TopDownCharts (who shared the above and below charts), “turns out long-term treasuries are suffering a deeper peak-to-trough drawdown than what happened to stocks during the great financial crisis. I would note that this is price only, and the total return is slightly less bad (albeit only by five ppts). But still, simply catastrophic.”

Neither may be flourishing right now, but in the battle of the safe havens, not only is gold outperforming long-term bonds, but it appears to be the safer bet going forward, especially once allowing for inflation.

The ABCs of gold and silver investing

Like most asset classes, precious metals have a number of positive attributes, as well as drawbacks or less desirable qualities. For gold and silver, the most frequently cited drawback is the lack of income, given they do not generate any yield, with any potential return driven solely by capital growth. Volatility is another drawback that is often cited.

While the above points are true, the broader context is always important.

Firstly, there is no hard and fast rule that says an asset has to provide income in order to be a good investment. A zero yielding asset that rises in price by 10% is a better performer than one that rises in price by 4% and pays a 4% yield.

Indeed, when one factor in the reality that capital gains are typically taxed at a lower rate than income (if the asset is held for more than a year), a case can be made those assets whose returns are solely delivered by capital growth would often be better for the end investor on a post-tax basis.

Secondly, while gold and silver are volatile, it is also true that:

• They are less volatile than most commodities.

• They display similar volatility to long-term bonds (as per the section above).

• Their volatility is similar to that of large cap equity market indices.

Finally, they are negatively correlated to risk assets, especially in periods of financial market stress. This means that holding gold and silver in a portfolio can lower overall portfolio volatility, even if gold and silver themselves are volatile.

It is also of course important to address the benefits of investing in precious metals, which include their strong long-term returns, the inflation protecting qualities they offer, their exceptional liquidity, and their absence of credit risk, with some of these factors addressed in this recent article.

Precious metals are also easily accessible to all investors and savers, irrespective of the budget of that saver or investors, which is one of the reasons why gold remains a go-to savings asset in developing/emerging economies across Asia.

Inside the office

The pullback in precious metal prices, combined with the long weekend across large parts of Australia has seen a surge in precious metal buying over the last few trading days, with volumes across all our key channels up significantly.
 
Product wise, this surge in turnover has been led by our signature products, including our ABC Bullion 1oz gold cast bars, and our ABC Bullion 1-kilo silver cast bars. We are also seeing continued buying of silver coins including the 1oz Canadian Maple Leaf, while those who like to dollar cost average into gold have used the recent price drop to make one off Top Ups to their ABC Bullion Gold Saver Accounts.
 
We also continue to see healthy levels of buyback activity across the group, a testament to the growing number of Australians that have built up precious metal holdings over the years, and the exceptional liquidity they offer investors.

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.