Gold corrects as yields surge

In this week's market update:

• Precious metal prices fell sharply this week, with gold off by 3%, and silver off by 6% in USD terms.

• The correction has seen gold fall back below USD $2,000 per troy ounce (oz), while silver is now trading at USD $23.50oz, with the gold to silver ratio (GSR) currently sitting at 85.

• Australian dollar gold and silver prices were supported by a 2% decline in the AUDUSD FX rate, with the Australian dollar last trading at USD 0.665, with the last five trading days seeing broader USD strength with the Dollar index up 1%

• Equity markets in the US caught a bid, with the S&P 500 up by 2%, while commodities were broadly flat.

• Bond yields spiked, both in real and nominal terms, with 10-year US treasuries now yielding 3.65%, while real yields jumped by almost 0.20% week on week.

Gold on the Ceiling

Precious metal prices continued to correct this week, with gold falling below USD $2,000 per troy ounce.

Several factors have contributed to the pullback, including an increase in the US dollar, which this week hit a seven-week high as measured by the US dollar index, as well as a sharp increase in bond yields, with 10-year treasuries now yielding 3.65%.

There have also been positive developments as regards the notorious US debt ceiling, with US congressional Republican Kevin McCarthy stating he expects to see a bill to raise the $31.4 trillion debt ceiling tabled next week.

These factors, combined with economic data (jobless claims, Philadelphia Fed business index) that while soft, came in better than market expectations, all contributed to a more positive tone for risk assets.

That in turn hurt demand for safe-haven assets like gold, with precious metals also negatively impacted by the fact that traders are beginning to push back expectations of when the US Federal Reserve will begin cutting interest rates.

Indeed, it’s now looking more possible that rates have higher to go in this cycle, with a Reuters report noting that; “the market has priced in a roughly 33% chance that the Fed raises the benchmark interest rate at its June meeting by 25 basis points. Around a month ago, markets were pricing in around a 20% chance of a cut.”

While pullbacks can test the faith of precious metal bulls, they also definitionally offer a chance to add to holdings at lower prices, which has tended to work out well for longer-term investors in the precious metal space.

We expect this will prove true again this time around, with no shortage of bullish factors for precious metals, something that the team at Saxo Bank noted in an update earlier this week. Their update touched on how low gold could go in this corrective period, with the market likely to see very strong support around the USD $1,920oz level.

Longer-term, they expect gold to be supported by the following factors (the below bullet points are a direct extract from their report).

• Continued dollar weakness as yield differentials continue to narrow.

• Peak Fed rates, when confirmed, have historically on the three earlier occasions during the past 20 years supported strong gains in gold in the months and quarters that followed.

• Central bank demand look set to continue as the de-dollarization focus continues to attract demand from several central banks. One unknown is how price sensitive, if at all, this demand will be. We suspect it will be limited, with higher prices not necessarily preventing continued accumulation.

• We believe inflation is going to be much stickier with market expectations for a drop back to 2.5% perhaps being met in the short-term but not in the long-term, forcing a gold supportive repricing of real yields lower.

• A multipolar world raising the geopolitical temperature.

• Low investor participation adding support should the above-mentioned drivers eventually provide the expected breakout.

While it remains to be seen how the above issues will resolve themselves, they are all talking points we hear from clients at ABC Bullion as to why they are adding to their precious metal holdings in the current environment.

The Pod of Gold

My colleague Nicholas Frappell, Global Head of Institutional Markets for ABC Refinery, recently recorded the latest edition of The Pod of Gold, onsite from the RIU Sydney Resources Conference which was held in mid-March.

Nicholas touched on a range of topics relevant to gold, including the potential for a secular decline in the USD, and the positive implications that would likely have for precious metals.
Other topics discussed included:

• Reasons central banks have been increasing gold holdings.

• Why interest rates are not as restrictive as some market commentators suggest.

• The implications of higher leverage in the financial system

• Yield curve control in Japan

Gold price forecasts were also discussed, with the potential for the precious metal to rise toward USD $2,500oz in due course.

How about Platinum?

Over the last few years, platinum has been something of a laggard in the precious metal space, currently trading at just over USD $1,000oz.

That is more than 50% below the price it was trading at back in 2008, when it peaked at more than USD $2,000oz. Back then, Platinum was worth double what gold was. Today, the situation is almost completely reversed.

The performance of platinum is highlighted in the below chart (sourced from Macrotrends) covering the last twenty years of platinum prices in USD terms, with the grey areas indicating recessionary periods.

While the lacklustre performance of platinum in the last fifteen years has negatively impacted investor demand, there are a range of factors that indicate the market will head higher in coming years.

As the World Platinum Investment Council noted in a recent update; “Platinum is one of the rarest metals in the world, with unique physical and catalytic properties making it highly valued across a number of diverse demand segments, including key technologies that make it a critical mineral for the energy transition.”

Platinum’s solid demand fundamentals also include the jewellery sector, which in any given year tends to range between 23-30% of total demand.
The missing piece right now is the investment side of things, which we alluded to above.

And while platinum will likely never offer the diversification benefits that gold does (given the much higher proportion of industrial demand that platinum has) it can still offer significant upside, especially given its currently trading at such a low price relative to gold.

Given it looks like the broader precious metal bull market cycle has some years to play out, one should not be surprised if platinum does see another surge in the years ahead.
Food for thought at least for investors wishing to diversify their precious metal exposure beyond just gold and silver.

Inside the office this week

Gold and silver investors took advantage of the price dip in precious metals, with many adding to their holdings over the last week.

Inside our Global Flagship store at Martin Place, and in our offices around the country, that was mostly seen through continued acquisition of our ½ ounce ABC Bullion gold cast bars, as well as 50-gram ABC Bullion gold cast bars, and 10oz ABC Bullion silver cast bars.

Through our 24/7 web portal, and in phone-based trading, we’ve seen a notable uptick in demand from larger investors, including SMSF trustees, with many choosing to hold pool allocated metals, while for other investors, silver coins remain their preferred form of bullion exposure.

We are also continuing to see healthy volumes of client sales, though not at quite the same levels we saw earlier in the year, with much more demand coming on the buy-side at this point in time.

The ABC Bullion 1/2oz Gold Cast Bar.

Warm Regards,

Jordan Eliseo
General Manager