Gold powers higher as monetary pivot awaits

In this week's market update:

• Precious metal prices powered higher in early week trading, with gold at one point hitting new all-time highs in USD terms, above USD $2,450 per troy ounce (oz).

• Silver also moved higher, at one point trading above USD $31oz though it has since pulled back, with the gold to silver ratio climbing back above 80.

• The pullback in silver occurred alongside a broader sell off in risk assets, with the S&P 500 and commodity prices including oil also falling.

• Bitcoin bucked the trend, rallying by more than 10%, though this so far looks like a technical bounce, with crypto markets still under some pressure.

• Bond markets also rallied, with yields falling as markets increasingly price in interest rate cuts in the United States in the lead up to the US Presidential Election.

Rate cuts are coming

Precious metal prices were driven by a range of factors this week, the most powerful of which is the increasing likelihood that the United States Federal Reserve will begin to ease monetary policy, with the first interest rate cut in more than two years likely to be delivered by September at the latest.

Gold and silver, which have been well bid all year, have by and large reacted positively to the increased likelihood of more dovish monetary policy, though both pulled back in trade in the latter part of this week.

Silver in particular has come under some selling pressure, having fallen below USD $30oz, with the gold to silver ratio back above 80. That will likely prove a compelling entry point for those with a mid to long-term investment horizon, given silver’s multiple tailwinds, and its current price relative to gold, which suggests it remains undervalued.

In other gold related news this week, we have seen:

• World Gold Council analysis looking at the Chinese market found that while wholesale demand remained weak (evidenced by a 31% year on year fall in withdrawals from the Shanghai gold exchange) ETFs in China saw continued inflows, with total assets rising for the seventh month in a row, with these products seeing their strongest H1 on record.

• Speaking of China, while much news has been made of the fact official purchases have stopped in recent months, it is likely a pause, rather than permanent withdrawal from the market, with China likely still looking to meaningfully boost official gold reserves in the coming years.

• In the Indian market, the World Gold Council (WGC) reports a decline in jewellery demand, but rising investment and central bank purchases, with the WGC noting: “Seasonal factors and high prices have dampened the demand for gold jewellery. At the same time, anecdotal reports indicate persistent demand for bars and coins, with indications of a likely shift from jewellery to bars and coins for some consumers. Moreover, there has not been significant distress selling of gold or profit taking from gold sales that is being reported, as consumers anticipate further price increases.”

• In hedge fund land, Bridgewater’s Ray Dalio has again sung gold’s merits, noting that even though gold is trading at record highs, it remains attractive, with the precious metal “an effective diversification tool, which means that if you adopt the classic asset allocation, a best portfolio should include more than 10% of gold when you encounter specific problems.”

• Strategist Dr Nomi Prins also spoke favourably about the outlook for gold, and why central banks have such a voracious appetite for the metal these days, with an interview from 16th July with Investing News Network noting that "We are at the cusp of I think a major, major bull cycle for real assets because of weakness in banks, because I think the (US Federal Reserve) and other central banks are less relevant with respect to monetary policy and controlling anything.

• Gold’s role as a wealth protector and diversifier was also noted by Sprott’s Ryan McIntyre, who spoke of the precious metals as the antidote to several macro concerns.

On that last comment regarding macro concerns, an excellent case can be made that whether those concerns involve geopolitics, extreme public deficits, problematic inflation levels or a potentially (likely?) overvaluation of the US stock market, gold can play a role safeguarding wealth in the period ahead.

Chart of the week

In early July, ABC Bullion released our market exclusive, Silver – A Sterling Investment. The report is a deep dive into the silver market. While silver is bought as investment by clients of ABC Bullion, there is no doubt that part of its rising popularity is due to its expanding use cases in industry.

As we stated in our report; “Silver is used in a vast range of industries today. It plays a key role in medicine, helps your car run, purifies water, acts as a catalyst, and is used in brazing and soldering. There is also still approximately 280 million ounces (nearly 9,000 tonnes) of silver used in photography, silverware and jewellery manufacturing each year.”
 
Photovoltaics are the key growth driver for silver, at least in terms of industrial demand, as the below chart highlights, with demand from this segment of the silver market growing from 50 million to almost 200 million ounces in the last several years.

This has been a huge contributor to ongoing silver deficit that has been in place for the past few years, which has coincided with a near doubling of silver prices.

Inside the Office

ABC Bullion has seen elevated trade activity with its client base since the new financial year began, with buyers and sellers of precious metals busy adjusting their portfolios now that the calendar has clicked over into July.

For SMSF trustees, who typically hold gold and silver as a portfolio diversifier, inflation hedge and source of outright return, that demand is typically expressed through pool allocated bullion investments, which offer a number of advantages for that investment cohort.

In-store we continue to see huge interest in lower denomination products, including the 10oz ABC Bullion silver cast bar, as well as ½ ounce ABC Bullion gold cast bars, while the Eureka 1oz silver minted coin remains a go-to for those who prefer to hold silver in coin form.

In online trade, we are also seeing an increase in activations for our ABC Bullion Gold Saver account, which often occurs around this time of the year, as clients and investors take stock of their finances, and set up savings plans in order to maximise long-term wealth.

Jordan Eliseo
General Manager
ABC Bullion Australia

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