Gold and the last bear

In this week's market update:

• Gold prices fell by 1% over the past week, with an overnight sell off pushing the price back below USD $1,950 per troy ounce (oz).

• Silver was also impacted, falling by 4% over the week, with the metal last trading at USD $24.20 oz. The larger decline in silver saw the gold to silver ratio (GSR) rise to 81.

• Equity markets were mixed, with the S&P 500 flat, while locally, the ASX 200 was +2%, last trading just below 7,500 points.

• Commodity markets continued to strengthen, led by oil, which was +5% over the week, last trading just below USD $80 per barrel.

• Bond markets saw a significant sell off, with 10-year yields in both the United States and Australia back above 4%, while the US dollar index (DXY) was +1% over the past five trading days.

Precious metals steady as rates move higher.

Precious metal prices have eased over the past week, with an overnight sell off driven by better than expected increase in US GDP eliminating the price strength seen in the early part of this week, when gold shrugged off the decision by the US Federal Reserve to push through another interest rate hike.

Last trading back below USD $1,950 oz, gold has fallen by 1% for the week, though it is still up 2% over the last month (and 14% for the year in USD terms). Despite this week’s minor pullback, gold remains just over USD $100oz, or less than 5% below its all-time high of just over USD $2,050oz.

Silver has also pulled back this week, falling by 4% to USD $24.20oz, with recent price action seeing the gold to silver ratio climb to 81, up from 79 five trading days ago.

Back to the Federal Reserve, and while some commentators thought they would keep rates on hold, they instead decided to hike, with rates now sitting in a range of 5.25-5.50%. That is their highest level in more than twenty years, with the current rate hiking cycle the most aggressive one on record in the last four decades.

In the Fed’s view, not only is inflation still high enough to warrant concern, but employment and the economy are still strong enough, with Fed chair Jerome Powell stating that staff at the central bank are no longer forecasting a recession in the United States in 2023.

Given that backdrop, it makes sense that the Fed would continue to hike, for now at least, with the recent spike in commodity prices (see chart below, sourced here which shows the Reuters/Jeffries CRB Index rallying by more than 10 in July in an almost uninterrupted charge higher) no doubt one factor stopping the Fed from declaring victory in the battle to get inflation back under control.

The exuberance and in equity markets and risk assets more broadly will be another source of concern for the Fed. We delve into this below, and why we think these market dynamics will resolve in favour of precious metals going forward.

The bubble continues to build.

Equity markets have delivered impressive growth in 2023, with the S&P 500 up by almost 20%, while the tech heavy NASDAQ has performed even more strongly, rising by 35%, as investors and speculators rediscover there love of all things tech related.

This performance has confounded several high-profile analysts, who believed a combination of high inflation, higher rates and slowing growth would see markets fall, rather than rise as strongly as they have.

These analysts include one of the more notorious Bears on Wall Street, Morgan Stanley’s Mike Wilson, whose been forced to admit he was wrong, or at least too early with his expectation that we’d soon see more equity market weakness.

While the strong rally in share markets seen so far in 2023, combined with the mea culpa of sorts from analysts like Wilson, and better than expected economic growth would be pleasing to stock market investors, the risks continue to build.

Evidence of this is seen in the below two charts, the first of which shows the S&P 500 (black line) combined with the option market positioning (red line), and how these have changed over the past five or so years.

As the chart makes clear, peaks in the S&P 500 often coincide with a peak in speculative positioning in the options market, and vice versa, with current market sentiment at euphoria levels, with @MacroCharts (who shared the above chart) noting that traders are currently “all-in”.
 
This level of speculative fervour is also seen in the chart below, which again shows the S&P 500 (blue line), though this time over a shorter time-period and net long futures market positioning.

Lance Roberts, who shared the above chart, succinctly noted that while this could be extended further, speculators haven’t been this long in quite a while.

Short-term, you could argue this is bullish for stocks. Over the medium term though that is far more questionable, with data like this suggesting a significant correction is on the cards.

When that correction happens, expect a flight to liquid defensive assets, of which gold has no peer.

Speculators have abandoned gold.

While stocks and gold are vastly different investments, with fundamentally opposed risk profiles, they do share one thing in common right now.

At present, both stocks (we are using US equities in this example), and gold are within a few percentage points of their all-time highs.

Unlike equities though, where there is rampant exuberance, as highlighted in the prior section of this report, gold is creeping along as quiet as a mouse.

In previous periods where gold was trading at close to USD $2,000oz, it was gaining far more media attention, and buying interest, with prior moves in gold to these levels seeing.

• Record searches for how to buy gold on Google.

• Gold being the most popular long-term investment according to surveys of US households.

• Gold ETFs being the fastest growing segment of the global ETF market.

• Gold market performance dwarfing that of the stock market, leading to increased investment as investors chased the relative outperformance that gold was offering.

The situation could not be more different this time. While retail demand for bars and coins remains healthy, ETF inflows are negative for the year so far, futures market positioning remains modest, and while gold is beginning to outperform stocks, its not yet of a magnitude that is capturing the markets attention.

Despite this, and the range of headwinds gold has fought off in recent times, which include the surge in real yields and reduction in headline inflation, the precious metal not only remains within USD $100oz (5%) of its all-time high, but looks to be building out an almost picture perfect reverse head and shoulders pattern. This can be seen in the chart below, sourced here.

Sum this up and gold is.

• Displaying strong price action

• Withstanding headwinds that would be expected to push prices lower.

• Out of favour with the market at this point in the cycle, which often represents an opportunity.

Those are the kind of factors one would typically expect to see at the start of a roaring bull market.

Precious Metal Forum and the Pod of Gold

The ABC Bullion Precious Metals Forum: “Gold & the Roaring 20s” is being held in just over three weeks. This week we have released a special edition Pod of Gold, featuring myself and my colleague Nicholas Frappell, Global Head of Institutional Markets for ABC Refinery.

In that podcast, Nick and I discussed a range of key topics that we will explore in detail at the upcoming forum, including.

• The similarities in the economic and geopolitical outlook of the 1920s and today, and how those factors may impact gold going forward.

• Why a gold price of USD $2,000oz is unlikely to be a price ceiling, and why precious metals can surge from current levels.

We also touched on some of the insights we can expect to hear from the international keynote speakers we are bringing to Sydney, including representatives from the World Gold Council, Metals Focus, and the World Platinum Investment Council.

As a special promotion of both the podcast and the upcoming forum, we are offering a 20% reduction in the regular forum price of $35 for clients who use the code PODOFGOLD when registering for a ticket.

See you at the ABC Bullion Precious Metals Forum

Inside the office

It has been another steady week of trade for ABC Bullion, with the new financial year, and the recent price strength in precious metals encouraging clients to increase their precious metal allocations.

For SMSF trustees, that typically means investments into pool allocated gold and silver, or ABC Bullion cast bars of gold and silver, with 50-gram ABC Bullion gold cast bars proving particularly popular.

Younger clients meanwhile continue to active ABC Bullion Gold Saver accounts.

Buybacks are also running at strong levels, with a certain segment of precious metal investors happy to lock in some profits, particularly on gold, which is again trading near AUD $3,000oz.

We’ve also seen lots of buying interest in the new Royal Mint Coronation Series. This range of gold and silver coins, which includes sovereigns, are proving to be a terrific addition for coin investors, who often like to accumulate a range of bullion coins to hold in their portfolio.
 

Jordan Eliseo
General Manager
ABC Bullion Australia

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