Gold holds key support level as rates rise

In this week's market report:

• Precious metals bounce off key support with silver outperforming

• Sharp fall in the Australian dollar sees AUD gold price reclaim AUD $2,500 per troy ounce (oz)

• Commodities remain under pressure as oil falls back toward USD $80 per barrel

• Cryptocurrency markets remain weak, with Bitcoin back below USD $20,000

ABC Bullion Market Data Snapshot

(Click to enlarge)

Dear Investor,

Gold prices bounced off key support levels near USD $1680 oz this past week, trading up toward USD $1,730oz at one point, while silver was an even stronger performer, up 4% in USD terms over the last five trading days.

The bounce in the two precious metals is an encouraging sign for precious metal bulls and follows on from our market update last week where we highlighted the recent net short speculative position in the gold market, and how that had often proved to be a good buy signal.

While its too early to say that the precious metal sector has completed its corrective cycle, it is worth noting that this week’s bounce occurred alongside a continued rise in US bond yields (however modest), declining breakeven inflation rates, a stable US dollar, and an equity market that has held its ground after recent falls.

Cryptocurrencies also remain fragile, with Bitcoin mired below USD $20,000 (-4% for the week), while commodities have also continued to pull back, down 3%.

Oil has been a major driver of the recent commodity correction, having fallen 4% in the last five trading days, and 8% over the last month, though it’s still up 20% over the last year. The oil pullback was at least in part driven by news the US Department of Energy released 7.5 million barrels of oil from the Strategic Petroleum Reserve (SPR), with the SPR now at its lowest levels since 1984.

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It’s also encouraging to see that gold has stabilised, and held important support levels, given where current demand levels currently sit, especially in Western markets.
ETF demand for example has dried up, with gold products seeing outflows for four months straight to the end of August. Over that four-month period, total outflows have come to more than 220 tonnes, which equates to almost 6% of total holdings.

These outflows represent a period of weakness that dates back to late 2020, as evidenced in the chart below from the World Gold Council, with the only notable period of inflows seen since coinciding with the beginning of the war in Ukraine.

Looking ahead, it will not take much to see outflows turn to inflows in the gold ETF market, especially if equity markets see further declines, which they well could given how expensive they remain, especially in the US.

Combine this with the potential for speculative money to add to long positioning in the gold futures market, and an uptick in investment into gold bars and coins (particularly in China, where COVID lockdowns saw Q2 2022 purchases fall 35% year on year), and you have the makings of a strong end to the year for gold demand.

Rates rise in Australia and Europe

As expected, central banks around the world, including the Reserve Bank of Australia (RBA) and the European Central Bank (ECB), pushed through further rounds of interest rate increases this week.

In Australia, the RBA have now hiked rates at each of their past five meetings, dating back to May, when they hiked by 0.25%, with four consecutive 0.50% increases seen from June through to September. Sitting at 2.35%, the local cash rate is now at the highest level it’s been since early February 2015, just over seven years ago.

While there are signs of weakness emerging in the Australian economy, the most notable of which is the sharp decline in the residential property market (August was the worst month for the local property market since 1983), its no surprise the RBA has kept their foot on the interest rate hiking pedal.

After all, while wage growth remains negative, the latest jobs figures suggest the unemployment rate is just 3.4%, its lowest level in 48 years, while retail sales have remained relatively robust. The latest set of GDP figures, which were also out this week, showed the nation's economy grew by 0.9% in the June quarter, with the yearly figure coming in at 3.6%.

It’s worth remembering that the RBA central bank is primarily focused on two key items.

• The maintenance of inflation within a 2-3% per annum target range over the cycle

• The promotion of full employment

At present, headline inflation rates (+6.1% in the year to June and expected to head above 7.5% by the end of 2022) are more than double the top end of the RBA’s target range, while as mentioned above, unemployment is at an almost five-decade low.

Furthermore, while the RBA would take no pleasure in the fact Australians are seeing the value of their homes fall, it's worth recalling that Australian property prices, which were already expensive pre-COVID, shot up by almost 30% in the two years to end December 2021.

Given this backdrop, the case for further rate hikes, at this stage at least, is a slam dunk, as the RBA itself clarified in comments made later in the week.

In Europe, the ECB lifted its key policy rates by 0.75%, with its key deposit rate now above 0%. They also downgraded their growth projections for the Eurozone, with GDP across the region only expected to increase by 0.9% in 2023, as the chart below illustrates.

Despite the deteriorating growth outlook, the ECB, like the RBA, is likely to continue to on their rate hiking path, especially given how pronounced the gap is between interest rates and headline inflation rates, evidenced in the chart below.

Kickstarting a precious metal bull market

While many investors think that gold prices should fall in environments that interest rates are rising (the argument being that because gold generates no income, higher cash rates make it harder to justify holding gold, or silver for that matter), the opposite is often true, with gold often seeing significant price rises in periods that rates are rising.

This is something we addressed in a specific article published earlier this week, and is also illustrated in the table below, which highlights several periods that interest rates went up for a sustained period, and the very impressive price gains gold generated in those periods.

Given this positioning, there remains substantial potential for equity market weakness. Should that eventuate, precious metals, especially gold, can be expected to find support.

Source: St Louis Federal Reserve, London Bullion Market Association

Given this market history, investors should not interpret recent rate hikes as a bearish sign for gold. Rather, it just may be the catalyst that kick starts the next leg of a precious metal bull market.

Inside our office this week...

This week has seen a continued increase in transaction activity, building on recent momentum. There has been a noticeable increase in platinum sales, though our best sellers have proven to be Pool Allocated Silver and ABC 1kg Silver Cast Bars, with silver coins also popular, as investors continue to accumulate precious metals.

Warm regards,

The ABC Bullion Team