Gold market retreats despite sticky inflation

In this week's market update:

• Precious metal prices continued to pull back over the last five trading days, with gold falling by 2% in USD terms, now back below USD $1,850 per troy ounce (oz).

• Silver was even harder hit, off 4% for the week and now down almost 10% in the last month, with the gold-silver ratio (GSR) now sitting at 85.

• Equity markets and commodities have remained relatively stable, while cryptocurrencies continue to bounce, with Bitcoin last trading above USD $24,000.

• Bond markets continue to sell off, with 10-year yields in Australia and the United States again heading toward 4%, as markets price in higher terminal interest rates.

• Despite several signs that inflation will prove stickier than policymakers would like, markets remain unconcerned, with 10-year breakeven inflation rates at just 2.35%, lower than they were a year ago.

Markets don’t believe in inflation

Precious metals prices continued to ease over the past five trading days, with gold and silver down by 2% and 4% respectively in USD terms.

Local currency investors saw slightly more modest falls, with the Australian dollar easing ever so slightly with gold and silver priced in AUD back below $2,700 and $31.50oz.

The week’s biggest news was the release of updated inflation data in the United States, which showed consumer prices rising at 6.4% in the year to end-January. While headline inflation continues to ease, largely in line with expectations, there are signs that it is proving stickier than hoped, with shelter costs coming to the fore, while median inflation data actually rose on a year-on-year basis to end-January, and currently sits above 7%.

These trends can all be seen in the following chart from the Cleveland Federal Reserve.

While trends in inflation are impossible to predict with 100% certainty, what is clear is that markets are still not pricing it in, nor positioning portfolios to withstand it. The gold price itself, and inflows (or the lack thereof) into products like gold ETFs are evidence of this alone, though the lack of inflation preparation by investors is not seen in the precious metal sector alone.
Bloomberg this week reported that investors have pulled more than USD $10 billion from inflation-sensitive ETFs (ie. products designed to protect against higher inflation) in the last 6 months, with investment behemoths from Blackrock to PIMCO suggesting investors may not have the protection they need.

Back to gold, and while we are currently in correction mode, there is no concrete evidence that the bull market in precious metals is over. As long as gold remains above USD $1,800oz, the set up still looks encouraging, with a decent chance the metal, as well as silver, will push meaningfully higher in 2023.

Market too dovish on interest rates

Following on from the belief that inflation will soon fall away and remain at low levels for the next decade is the belief that the Fed will soon be able to go into easing mode, with rates set to soon peak, then head lower over the next two years.

These two beliefs are intricately linked, with one logically following the other, as if you don’t believe inflation will prove sticky, it’s natural to think the Fed can and will ease interest rates at the first sign of trouble in the economy.

The chart below, produced by @CharlieBillello, the Chief Market Strategist at CPI wealth, highlights where the market currently sits with regard to rate expectations, with an expected peak in rates of just over 5% set to occur around the middle of the year.

After cresting this rate hike mountain, the Fed is then (according to the market) set to commence cutting almost immediately, with the better part of 200 basis points, or 2%, of interest rate cuts priced into the market between now and February 2025.

This rate pricing is a key reason why asset markets, including equities, haven’t sold off more aggressively in recent times, with markets still firmly believing that the Fed will ultimately have their back, and provide more stimulus.

That may turn out to be correct, though we’d note share prices typically fall, rather than rise, in the immediate aftermath of the Fed pivoting monetary policy from a hiking to cutting cycle.
Were that to happen again, we’d expect to see precious metals supported, as demand for gold as both a portfolio diversifier and an inflation hedge would likely increase.

Australia on the brink?

Australia is obviously not immune to the challenges plaguing the global economy, with the latest data from the Australian Bureau of Statistics (ABS) showing a slight rise in the unemployment rate, from 3.5% to 3.7% between December 2022 and January 2023.

While the unemployment rate remains incredibly low by historical standards, this increase is perhaps a sign that we’ve reached the top when it comes to employment, with job losses potentially picking up from here, and wage growth likely to be more subdued.

One factor that compounds the concern when it comes to the economic outlook is the fragile state of consumers, with confidence again plunging last week. It fell by almost 6 points, according to ANZ-Roy Morgan, who monitors this weekly, with confidence now at levels last seen in April 2020 (ie. at the height of pandemic fears), with those paying off a mortgage particularly hard hit.

This is no surprise when one considers the outlook for interest rates, with markets now expecting the RBA to hike cash rates above 4% later this year, as highlighted in the chart below.

Rate hikes of this magnitude would likely lead Australia close too, or into a recession, something asset prices in this country are not currently reflecting.
Again, expect gold to be well supported if such a scenario eventuates, with risk conscious investors preparing for such an eventuality.

Inside the office this week

This week has been all about gold, with ABC Bullion 1oz gold cast bars, and ABC Bullion 50 gram cast bars flying off the shelves. HNW and SMSF investors have also taken advantage of the recent price dip, buying 250-gram ABC Bullion gold cast bars for their portfolios.

Finally, I’d like to wish a warm congratulations to Cole, who was the lucky winner of our recent ABC Bullion Gold Saver promotion. Cole has had his gold saver balance credited with an additional $1,000 worth of gold, a nice boost to his precious metal savings plan. For those interested in the ABC Bullion Gold Saver, you can find out more via our website.

The ABC Bullion 50g Gold Cast Bar.

Warm Regards,

Jordan Eliseo
General Manager

ABC Bullion Australia

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