Gold falls as greed rules markets!

In this week's market update:

• Gold prices continued to ease over the past five trading days, with the precious metal falling by 2% in USD terms, last trading at USD $1913oz.

• Silver saw an even bigger correction, falling by 5%, and is now trading just above USD $22oz, with the gold to silver ratio (GSR) now sitting at 86.

• Australian dollar precious metal prices were supported by a 2% decline in the Australian dollar, with gold currently trading at just over AUD $2,800oz and silver just below AUD $33oz.

• Equity markets were mixed over the week, with the S&P 500 off 1%, while Australian markets were flat.

• Cryptocurrency prices boomed, with Bitcoin up 18% and now trading back above $30,000.

• Oil prices continued to fall, off by 2% and now below USD $70 per barrel.

• Bond yields continue to climb, with US 10-year government bonds now yielding 3.80%, while in Europe and the United Kingdom, central banks implemented aggressive interest rate hikes in a bid to stamp out inflation.

This is getting serious now

Gold prices continued to correct this week, with the precious metal falling by 2% to USD $1913oz. Silver was even harder hit, falling 5% to USD $22.30oz, with the gold to silver ratio (GSR) last sitting at 86. The current GSR is the same as it was one year ago, though both metals are up by 4% in that time-period.

In Australian dollar terms, precious metals were better performers, with a 2% decline in the AUDUSD exchange rate (the AUD was buying USD 0.667 overnight), keeping gold flat for the week at AUD $2,828oz, while silver has fallen just below AUD $33oz.

This week’s price action has had multiple drivers, from a continued rise in bond yields in the United States, to aggressive monetary policy tightening in Europe, which will almost certainly be replicated in the United States, and Australia for that matter.

The central banks that hiked this week include the Bank of England and the Norwegian Central Bank, both of whom increased interest rates by 0.50%. Make no mistake, central banks are seriously trying to squash inflation, despite the obvious pain higher rates are causing in their respective economies, from rising mortgage stress to lower consumer confidence and home building activity.

Real yields also continue to increase, while 10-year inflation expectations largely remain static at just over 2.20%. In short, markets continue to discount the risk of inflation becoming entrenched, which is one of the factors that is acting as a headwind for gold now.

Adding to gold’s challenges is the continued freefall in global liquidity (see chart below, sourced here), with M1 money supply now falling at a faster rate than we saw back in 2000, back when the Global Financial Crisis hit around 2008, and in late 2019, just before COVID hit.

Despite these challenges, the pullback in precious metals has only seen gold fall by 7% since early April. While that has had a definite hit on sentiment, with many investors waiting on the sidelines, fearful that gold could drop further there appears to be an underlying strength in the precious metal complex, which augurs well for investors with a longer-term view.

That doesn’t mean there can’t be more pain in the short-term with economists at Credit Suisse suggesting this gold correction may see the precious metal fall toward the 200-day moving average, which currently sits at almost exactly USD $1,850oz.

Time to buy the dip

While gold faces some short-term headwinds, the outlook remains positive, with prices still in a clear uptrend, and a multitude of factors supporting demand.

This is certainly the view of Swiss banking giant UBS, who in a 22nd June note on the outlook for markets stated that; “we continue to expect rising gold prices over the coming year, supported by a weaker turn for the US dollar, peaking US rates, robust central bank demand, and safe-haven flows. We expect gold to reach a new all-time high, and maintain a 12-month price target of USD 2,250/oz. We also see the yellow metal as a good diversifier in a portfolio context, and as a hedge against geopolitical and growth risks.”

The factors that UBS speak of are obviously helping fuel demand for gold, which has attributes that appeals to essentially all types of investors, from younger investors who may have previously engaged with cryptocurrencies, through to high net worth individuals, family offices and institutional investors.

Given this outlook, and the strong underlying demand that is forecast precious metals, investors who add to their gold and silver holdings in this current corrective period may be well rewarded in due course.

Time to get fearful

Most precious metal investors are aware of the positive role that gold can play in balancing a portfolio, with its historically negative correlation to risk assets like shares in periods risk assets fall mitigating overall portfolio losses.

Given this attribute, it’s part and parcel of the broader market cycle that in periods risk assets are soaring, and risk appetite is healthy (meaning investors want to buy more shares), gold demand may be somewhat depressed, and prices may struggle.

We appear to be in such a moment right now, with sentiment data suggesting investors are incredibly bullish right now. This can be seen in the chart below (sourced here), which shows sentiment amongst retail investors (red line), and a dotted blue line which represents the S&P 500 index level.

As the chart highlights, investors are now approaching levels of bullishness last seen in late 2021, which was just before the S&P 500 entered a meaningful correction that saw share prices drop the better part of 30% in real terms.

This bullishness is particularly hard to reconcile with the broader economic backdrop we see developing (slowing growth, rising financial stress), nor the fact that the equity risk premium is now at 20-year lows.

Make no mistake, investors are greedy right now.

The smart move may well be to get fearful, with gold one of the assets that should benefit when sentiment turns, as it inevitably does.

Pod of Gold!

My colleague Nicholas Frappell, who is the Head of Institutional Business for ABC Refinery, has just released the latest edition of The Pod of Gold, a podcast he appears in on a regular basis.
The latest edition, which was filmed at the recently completed Mines and Money conference held in Melbourne, focused on a range of precious metal related subjects. These include the recent decision by the US Federal Reserve to hold interest rates steady, and why, despite that decision, the Fed is likely in pause mode, rather than at the end of their rate hiking cycle.

The recent strength in the Australian dollar (which has helped create a great dip buying opportunity for Australian precious metal investors) is also a subject Nick discussed, while the importance of the Chinese economy to the outlook for silver is another factor.

Nick also touched on some long-term forecasts for the precious metal sector, with his price targets, should they eventuate, likely to please precious metal bulls.

Timestamps for The Pod of Gold are as follows:

• 00:00 - Intro

• 00:28 - Gold technical price action

• 03:19 - Support for the Gold price

• 05:18 - News on Silver

• 06:30 - The Fed Decision

• 11:13 - The Australian Dollar

• 18:36 - Key takeaways from Mines and Money conference

• 21:31 - Long term forecasts

• 24:33 – Outro

Inside the office

With just over a week to go in the 2022-23 financial year, investors continue to accumulate precious metals, with ABC Bullion continuing to see strong buying interest across all our sales channels, most notably for gold.
 
Online, we continue to see healthy levels of demand for pool allocated metals and ABC Bullion gold cast bars, while in-store, gold minted tablets, especially 10-gram ABC Bullion minted tablets, have proved particularly popular.
 
Despite slower overall sales for silver, 10oz ABC Bullion silver bars remain a popular investment choice, as do our range of 1oz silver coins, which investors often purchase in tubes of 25 coins, or monster boxes.
 
From a client selling perspective, while we continue to see healthy turnover levels, the pace of it has eased. This is to be expected with investors more likely to be adding to holdings given the recent price dip, rather than looking to liquidate holdings with gold now off almost AUD $200oz (circa 8%) from the all-time high hit earlier this year.

Jordan Eliseo
General Manager
ABC Bullion Australia

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