Gold and the moment of truth!

In this week's market update...

• Precious metal prices steadied this week, with gold +1% in USD terms, last trading at USD $1,992.10 per troy ounce (oz), while silver was flat, still trading just below USD $24oz.

• The rally in precious metals over the last month has seen gold again trade near USD $2,000oz, with market participants eagerly observing to see if it can push through and hold above this key price barrier as we approach December.

• Risk assets were largely flat for the week, with the S&P 500 eking out a 1% gain, while the ASX 200 is unmoved.

• Commodity prices were also flat, though oil bounced +4%, with crude last trading at USD $76 per barrel.

• Bitcoin continued its recent climb, up another 3% to $37,297 per coin.

• Bond yields continued to ease, though the pace of decline has slowed, with 10-year government bonds in both Australia and the United States sitting near 4.50%.

Deflation, inflation, and gold!

Precious metal prices steadied this week, with silver unchanged in USD terms, while gold was +1%, and last trading just above USD $1,900z.

With December fast approaching, the market is still digesting and evaluating several factors that can impact gold, including when the US Federal Reserve does finally call time on its rate hiking agenda, how that will impact the US dollar, as well as how the geopolitical picture evolves as we head into 2024.

Kelvin Wong, senior market analyst Asia Pacific at OANDA discussed these very developments recently, noting that; “The anticipation of this effective pivot towards interest rate hike cycle peak is translating to ongoing softness in the U.S. dollar and the longer-dated U.S. yield which will support gold prices, at least in the short term,”

If recent history is any guide, it wouldn’t shock to see the rally in gold continue into December, with research from Saxo Bank highlighting the fact that both gold and silver rose in every December between 2017 and 2022, with an average price rise of 4% for gold, and 7.25% for silver.

This can be seen in the table below., which was produced by Saxo, with Ole Hansen, Saxo’s Head of Commodity Strategy stating in his update that; “Our gold monitor shows how the recent robust performance has left gold prices a bit elevated compared with the corresponding but still supportive moves in dollar and yields, while the cost of carry as seen through a slightly lower yield on 12-month US treasury bills has started to come down. We believe the risk/reward increasingly favours gold, and that the best is yet to come, but for that to happen investors need a stronger conviction on Fed rate cuts in order to attract fresh demand from investors, including long-only asset managers who have been net sellers of ETF’s for months amid the mentioned high cost of carry.”

Should history repeat, and we see another Santa Rally, then gold will be trading well north of USD $2,000oz by the time Christmas arrives in just over a month.

Looking ahead to 2024, and we can’t help but feel that inflation dynamics will prove a key determinant in not only the performance of precious metals, but other asset classes, and the economy more broadly, both internationally, and in Australia.

To that end, the chart below, shared by @CallumThomas of TopDown charts is a great way of visualising the battle between inflation and deflation, and how it evolves over time.

It shows the proportion of countries (as a percentage) facing very high/hyperinflation, defined as an increase in prices of more than 10% per annum, vs the proportion of countries facing deflation, where consumer prices are falling.

For the last couple of years, high inflation has been the key problem, evidenced by the spike in the blue line which shows that more than 40% of countries were facing inflation of 10% per annum or more by the middle of 2022.

That has since dissipated, with rate hikes across the developed world helping bring inflation back to more palatable levels. Indeed, we are now at a stage where some countries are again facing deflation, whereby consumer prices are falling.

While at a first glance this re-emergence of deflationary forces would be expected to be bad for gold (after all, the basic narrative is gold needs high inflation to thrive) history suggests it’s not that clear, with gold often thriving in periods inflation falls away.

This is evident in the chart itself, with a spike in deflation occurring around the time the GFC hit, again around 2015, and again around the start of 2020.

All of those were great times to be going long gold, as the inevitable policy response from central banks and governments is the deployment of both fiscal and monetary stimulus, which have traditionally boosted demand for the precious metal.

There is a very good chance we will see similar trends play out in 2024 and beyond.

Fiat risks and the case for gold!

For many Australian investors, Donald Amstad needs no introduction. A more than forty-year veteran of the markets, Amstad worked for Nomura, JP Morgan, Bank of America and Aberdeen Standard, though he is best known for a 2019 interview (pre-COVID) with Livewire Markets which has had more than 800,000 views.

He recently sat down with Livewire Markets again for an updated conversation on how he is seeing the markets today, the glaring risks investors face going forward, and how he is positioning his own portfolio to both protect and grow wealth in the coming years.

Critically, he spoke of the case for gold, and why it may be a go to asset in the period ahead, calling it the “standout potential beneficiary” of the growing risks that fiat currencies and sovereign debt face.

For an illustration of this challenge, consider the chart below, which shows interest expenses on US Public Debt. Fast approaching USD $1 trillion per annum, it will soon be the largest line item in the Federal Budget, surpassing Social Security, according to @CharlieBilello, who shared the chart.

Back to Amstad, and his interview with Livewire is worth listening to in full, with his comments on gold, the potential for gold backed currencies, and whether the precious metal or sovereign bonds are more reliable safe haven beginning around the 12-minute mark.

Pod of Gold

My colleague Nicholas Frappell, who heads up Institutional Relationships for ABC Refinery, sat down to record a podcast at the IMARC mining conference in early November.

As usual, the podcast covered a range of topics, whether there was a ‘war premium’ built into the gold price and how that compares to a ‘fair value’ model for the precious metal, as well as emerging geographic threats in the Middle East, and how the ongoing Israel-Palestine conflict will impact gold prices going forward.

Timestamps for the podcast are as follows:

• 00:00 – Intro

• 00:35 – Gold technical price targets

• 01:30 – Downside targets

• 02:09 – Gold's move higher

• 04:05 – Is gold adjusting to the conflict?

• 06:54 – What is gold's fair value?

• 09:45 – How the conflict is impacting gold.

• 12:58 – Unlikely to see a rapid fall in gold.

• 14:24 – Managed money agnostic on gold

• 16:00 – Key takeaways from the LBMA conference

• 18:15 – Key takeaways from this episode

Inside the office this week

November is shaping up as a record month for in-store turnover at ABC Bullion, with the business recording one of its busiest Diwali periods on record.

Sales throughout this period have been led by a range of Diwali products, including 5 gram Lakshmi and Ganesh gold coins, 1oz Lakshmi and Ganesh silver coins, as well as other feature Diwali products.

We’ve also seen a huge uplift in demand for ABC minted tablets, with both gold and platinum highly sought after.

Gold’s recent flirtation with the USD $2,000oz price point is also helping drive demand for pool allocated products, as well as ABC cast bars, though bargain hunter investors also have a keen eye on silver, given how cheap it appears relative to gold today. For these investors, the full range of ABC cast silver bars are in demand, led by our signature 1 kilo ABC Bullion silver cast bar.

Lastly, we are also seeing a strong appetite for silver coins like the ABC Bullion 1oz Eureka, and our range of products from The Royal Mint, many of which we are offering with significantly reduced premiums as part of a Black Friday and Cyber Monday promotion. 
 

Jordan Eliseo
General Manager
ABC Bullion Australia

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