Gold holds support despite higher rates

In this week's market update:

• Precious metals were mixed this week, with gold prices up 1% to USD $1,836 per troy ounce (oz).

• Silver on the other hand was weaker, down 3% to USD $21.50oz, with the gold to silver ratio (GSR) last sitting at 88.

• Foreign exchange, commodity and equity markets were relatively stable, with oil up 3% to $78 per barrel, while Bitcoin was off 2%, last trading just above $23,000.

• The biggest move was in bond markets, with 10-year yields in the United States now back above 4%, as markets price in higher terminal cash rates.

• Inflation expectations continue to rise, with Eurozone data highlighting persistent price pressures, while 10-year breakevens hit 2.44% in the United States.

More rate pain on the way!

Precious metals markets were mixed this week, with gold firming, up 1% to USD $1,836 per troy ounce (oz), while silver remained mired in its recent downtrend, falling by 3% to USD $21 oz, and now down 10% over the last month.

Across the course of the week, there were several key developments of note for market watchers, with Eurozone inflation data showing that prices were rising by 8.5% per annum across the Eurozone area, while core inflation was 5.6% year on year, substantially higher than market expectations.

This result, alongside a slew of other inflation data, has made it clear that while headline inflation rates continue to ease, there will be no easy path back toward the 2-3% per annum inflation levels central banks either explicitly target, or implicitly tolerate, with a late February study suggesting there is little chance of getting inflation down without triggering a recession, and/or spike in unemployment.

Research from the Cleveland Federal Reserve strikes a similar tone, highlighting the challenge central banks face, as they balance trying to bring inflation down (which will help everyone to some degree) with one of the few tools they can use, higher interest rates (which will hurt a smaller group of people, but to a much larger degree).

Irrespective of how central banks choose to proceed, markets are already pricing in a more substantial spike in rates, with implied yields suggesting rates in the United States will head toward 5.5% by September this year, while 10 year US Treasury bond yields are again above 4%.

Markets are also beginning to price in higher for longer inflation levels, with 10-year breakeven inflation rates in the United States now sitting at 2.44%, though this still seems optimistic (on the low side) given historical periods of high inflation, and just how hard it is to eliminate.

The uptick in inflation expectations is no doubt part of the reasons commodities have found something of a bid in the last week, with oil up 3% in the past five trading days.

That should be no surprise, given the performance of commodities, and gold specifically during past periods of high inflation, where they have been the only asset class with a demonstrated history of protecting purchasing power in such environments.

This was a subject covered in a detailed Bloomberg article from Feb 28th, which includes the graph below sourced from the Credit Suisse Global Investment Returns Yearbook 2023 Summary Edition.

While history may not repeat, it certainly rhymes, with the above data highlighting why more and more investors are turning to gold in the current environment.

Time to buy silver?

While momentum investors would be hesitant to buy silver here, gold’s recent strength and ability to hold USD $1,800 oz despite the spike in rates, coupled with the bounce in gold miners that we’ve seen in the last week (GDX, the flagship gold mining ETF, is up 5% over the last five trading days) suggests there is a latent strength in the precious metals market.

That strength is particularly impressive given the pricing in of higher short-term rates and the spike in longer term bond yields that we are seeing, all of which raise the nominal opportunity cost of buying and holding precious metals, and the continued lack of investment interest from gold ETF buyers, who are typically a key part of the market.

In time, that part of the market will return on the buy side, and in volume, supporting both higher gold prices, and possibly helping to spark a major rally in silver, with long-term    accumulators, including clients at ABC Bullion, seeing silver’s current correction as an obvious buying opportunity.

Given the gold to silver (GSR) is now again approaching 90, which indicates that silver remains very undervalued, we expect those investors adding silver to their portfolio to be well
rewarded.

900,000 problems heading Australia’s way!

Like the rest of the world, the Australian economy is at something of a crossroads. On the positive side, the jobs market remains incredibly robust, with an unemployment rate of just 3.5%, near multi-decade lows, while China’s emergence from its COVID slumber likely bodes well for commodity demand in the immediate future.

On the negative side, wages growth remains negative in real terms, consumer confidence figures have collapsed, and savings rates have also plunged, essentially halving in the last six months to just 4.5%. Given high levels of inflation, it’s clear Australian’s are raiding their piggy banks to keep up with cost-of-living pressures.

Last but by no means least, the continued weakness in the housing market, and the interest rate crunch mortgage holders are facing leaves the economy at genuine risk of falling into a recession, either outright, or in per-capita terms at least, with data for Q4 2022 highlighting that the economy has essentially flatlined.

The problem is likely to get worse before it gets better, for two key reasons.

The first is that, much like the United States, forecasts for how high the Reserve Bank will need to raise interest rates are being upgraded, with the market now expecting the cash rate to hit 4.2% by later this year.

Secondly, and perhaps more importantly, there are up to 900,000 Australian’s, who represent almost a quarter of Australia’s total mortgage book, who currently remain on fixed rate mortgages which were taken out when rates were at pandemic level lows, with those fixed rate mortgages set to expire, and switch to variable rates in 2023.

It’s also no surprise major banks themselves remain gloomy on the outlook for the housing market, with Westpac now forecasting a further 8% decline in residential real estate prices across the course of this year.

In terms of knock on effects, continued weakness in housing will lead to a broader hit to earnings for most Australian companies, pressuring the ASX 200.

It should also fuel demand for other assets, especially those with a history of thriving in the difficult kind of environment we are heading into.

Of those assets, none are more liquid, nor easier to incorporate into a portfolio than precious metals.

Inside the office this week

Inflation hedging remains a key theme, while for others, concern about the continued weakness in the housing market has seen them turn to gold as their hard asset of choice in the current environment.

ABC Bullion cast bars remain incredibly popular, especially our signature 1oz ABC Bullion cast bar gold, and 1kg ABC Bullion cast bar silver, while in-store, silver coins and gold tablets continue to trade briskly.

We also continue to see reasonable levels of client sales, with many using the recent spike in gold above AUD $2,700 per troy ounce as a chance to free up cash.

The ABC Bullion 1kg Silver Cast Bar.

Warm Regards,

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.