Gold eases as bond yields soar

In this week's market update:

• Gold prices continued to ease this week, with the precious metal falling by another 1% in USD terms to $1,933.30 per troy ounce (oz).

• Silver also fell, down by 6% in USD terms to $23.60oz, with the gold to silver ratio (GSR) climbing to 82.

• A sharp fall in the Australian dollar, which dropped by 4% vs the USD (last trading at USD 0.654) helped local investors, with gold +3% and silver -2% in AUD terms over the past five trading days.

• Equity markets were also soft (S&P 500 -1%, ASX -2%) as were commodities, though oil bucked the trend, rallying by 2% and now trading back above USD $80 per barrel.

• 10-year government bond yields surged again in both Australia and the United States and are now trading well above 4%, with prices in the US -4% for the week and -21% over the past twelve months.

Precious metals leading the markets

Precious metal prices continued to correct this week, with gold -1% in USD terms to $1,933.30oz, while silver was -6%, last trading at USD $23.60oz.

The move lower in precious metals has occurred against a backdrop of a bounce in the US dollar, with the dollar index (DXY) up by 1% to 102.49 over the past five trading days.

The correction in gold and silver has also been driven by a sharp move higher in both nominal and real bond yields, with US 10-year treasuries now yielding 4.20%, while real yields on the same bonds are now sitting at 1.83%.

While this moves higher in both nominal and real yields will likely represent a headwind for precious metals for as long as it continues, it would be remiss not to acknowledge how well both gold and silver have taken it in their stride, despite the weekly fluctuations that are part and parcel of investing in precious metals.

Indeed, over the past year, gold is +10% and silver +18% in USD terms, despite the 1.60% increase in real yield available on 10-year US treasuries that have occurred over this period.

Part of gold’s strong performance over this time period is no doubt due to the fact that while yields on bonds have risen substantially in the last year, making them (all other things being equal) more attractive to investors who buy them today, existing holders of US treasuries have had to wear quite a significant mark to market losses, with the price of US 10-year treasuries falling by just over 20% in the past twelve months.

US equities are also only +8% over this period, and that has only come about due to rampant speculation, much of which is again concentrated in tech, while both oil (despite its recent recovery), and the broader commodity complex are -10% over the past twelve months.

Given this backdrop, and relative performance of other more mainstream assets, one can make a very convincing argument that both gold and silver are performing very well, despite the current uncertainty and headwinds facing the sector.
 
Where to next for gold demand!

The World Gold Council released their quarterly demand trends report earlier this week, looking at activity across the key sectors of the gold market, from bar and coin demand, to central bank purchases, to ETFs and industrial users.

High level, it was another solid quarter for gold demand, with more than 900 tonnes of the precious metal purchased in the three months to end June, a figure that represents a 2% decline from the same period a year prior.

Highlights from the quarter, as per the World Gold Council report (the below four bullet points are directly sourced from them), included:

• The LBMA (PM) gold price averaged US$1,976/oz during Q2, a record high. This price was 6% higher y/y and 4% above the previous record high from Q3’20. Currency moves meant that several countries saw further strength in local gold prices, notably China and Turkey.

• H1 gold demand (excluding OTC) was 6% lower at 2,062t. The y/y decline was largely explained by this year’s modest outflows from gold ETFs being compared with the strong surge of inflows in early 2022. Total demand in H1 (inclusive of OTC and stock flows) increased by 5% to 2,460t.

• Central bank gold buying in H1 reached a first-half record of 387t. Despite the Q2 slowdown, the strong Q1 start set the seal on a record-breaking H1. Buying activity remains widespread and distributed among both emerging and developed countries.

• Local market conditions have driven exceptional gold demand in Turkey in recent quarters. Combined H1 jewellery, bar, and coin demand reached 118t, the highest first half year since 2007 when Turkish lira gold prices were a fraction of their current record levels. Presidential elections, dizzying inflation and currency weakness all contributed to drive demand up.

These data points are encapsulated in the chart below, which shows the major contributors to precious metal demand in Q2 for each year over the past decade.

On balance, we are encouraged by this data, especially gold’s ability to hit a record average price for Q2 despite the continued absence of demand from the ETF sector, and a pullback in central bank buying.

ABC Bullion Precious Metal Forum

It is now less than three weeks until the ABC Bullion Precious Metal Forum; “Gold and the Roaring 20s” takes place at the Ivy Ballroom in Sydney.

With gold looking like it may soon again push above USD $2,000oz (and possibly establish that price level as a floor), it’s the perfect time for investors to be reviewing their portfolio, and the role that gold and silver can play in helping to both build and protect wealth.

We’ve sold well over 400 tickets to the forum, and it’s shaping up to be a wonderful night for ABC Bullion and our clients.

There are some tickets still available if you’d like to attend, with registration available via the below embedded link.

See you at the ABC Bullion Precious Metals Forum

Inside the office

We continue to see solid levels of two-way trade in precious metals at ABC Bullion, both through our 24/7 online channels, and through our Global Flagship at 38 Martin Place.

With gold again flirting with the AUD $3,000oz price level, SMSF investors are again proving to be one of the key demand channels, with most of these clients buying pool allocated metals and ABC Bullion gold cast bars.

Silver is also seeing renewed demand, with monster boxes among the more popular choices, while in-store, 1oz ABC Bullion, ½ ounce ABC Bullion and 50-gram ABC Bullion gold cast bars remain amongst the most popular choices.

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.