Gold powers higher despite spike in rates

In this week's market update:

• Gold prices surged to another record high this week, with a + 3% rally seeing the precious metal trade at USD $2,373.20 per troy ounce (oz), despite a surge in bond yields.

• Silver was also stronger, rising by +5%, and now back above USD $28oz, with the gold to silver ratio falling to 84.

• The rally in precious metals has well and truly turned into ‘full blown’ bull mode, with both metals up by 10% or more in the last month, and heightened media attention about what is driving the current gold rally.

• Currency and equity markets were relatively calm over the past five trading days, with the Australian dollar easing to USD 0.652, while the S&P 500 is attempting to climb above 5,200 points.

• The bigger move was in the bond market, with yields surging as market participants begin to price in the risk of higher for longer inflation. This was seen with a 0.25% increase in the yield on 10-year US treasuries which are again trading back above 4.50%, while 10-year breakeven inflation expectations climbed to 2.40%.

No shaking the gold bull
Precious metal prices continued to surge higher this week, with gold prices trading up toward USD $2,400oz and above AUD $3,600oz, while silver is approaching USD $29oz and AUD $44oz.

This week’s move has now seen gold and silver rise by 10% and 13% respectively in USD terms over the last month, with AUD prices up by 11% (gold) and 15% (silver), owing to a minor pullback in the value of the Australian dollar over this period.

What makes the move in gold even more impressive is that it has occurred despite:

• Relative calm in equity markets, with the S&P 500 and ASX 200 both +1% over the past month, and trading at or near all-time highs.

• Booming interest in cryptocurrencies, with inflows into Bitcoin ETFs running into the billions.

• Strength in the US dollar, with the dollar index (DXY) rising by 1% this week and by 2% in the last month.

• A surge in bond yields, with 10-year government bonds in the United States seeing yields rise by 0.27% in the last month.

Indeed, it has only been in the last week that we have even seen a spike in media interest and coverage around gold, with many market commentators openly questioning the gold rally, noting the above factors, all of which would typically be expected to be headwinds to gold price appreciation.

The strength in the precious metal market has led precious metal expert Ross Norman to note that gold is proving impervious to headwinds, looking specifically at gold’s reaction to CPI data earlier in the week. Norman commented that; “Strong inflation data this afternoon prompted the dollar and 10-year treasury yields to rally, casting strong doubts about a June Fed rate cut ... and in a "normal" market gold would have corrected very sharply lower ... what did it do?

Well essentially it ignored it.

Interestingly there was a blip lower suggesting someone has not yet the script that says that gold is now in a new paradigm. Get with it.

With US CPI coming in hot, gold dropped $30 and then immediately bounced even as the USD and yields sailed higher ... largely recovering its composure ... the gold buyer is clearly keen to hit the bid on any dips.

They say you best see the character of somebody from how they behaviour under adversity ... and arguably so it is for markets ... well the reading here is that the gold buyer behind this rally has real conviction.”

We could not agree more, with the price strength of gold even more meritorious given it has occurred despite persistent outflows from the ETF section of the gold market. This was something Charlie Morris of Atlas Pulse discussed in his most recent gold market update, in which he noted; “Just as gold has overcome higher rates, it has overcome 30 million ounces of outflows from the ETFs. At current prices, that is $70 billion of selling pressure, a financial tsunami for most asset classes, yet gold has powered through to an all-time high.”

Pod of Gold 
My colleague Nicholas Frappell, Global Head of Institutional Markets at sister company ABC Refinery, released his most recent Pod of Gold earlier this week.

Titled “Has this heart stopping #gold rally peaked”, the podcast looks at current drivers behind gold's recent rise, the magnetic pricing effect of open interest and why “2332” is the most important number to watch for April.

The episode is a must listen for precious metal investors, with timestamps included below:

Timestamps:

• 01:27 – Fed suggests they will cut rates, gold leaps

• 06:09 – Broader macro forces behind gold

• 08:25 – Bank of Japan and yield curve control

• 15:40 – Fast money leads the market

• 19:58 – Slow money still lags

• 21:58 – Why gold will cluster around US$2,332

• 26:35 – Physical gold demand remains strong

Chart of the week
The following chart was shared by Nicky Shiels, Markets Metal and Macro Analyst at MKS PAMP. It shows the correlation between the USD gold price, and total interest costs on the US Federal Government debt.

According to Shiels, there is a correlation of 0.80 between increases in debt interest payments and a rising gold price.

Given the outlook for the US budget (deficits in ever year for decades to come) and the likelihood that rates will stay higher in the years ahead, the total interest cost the US Treasury must bear is only heading in one direction.

It is but one of many long-term tailwinds supporting physical bullion.

Inside the office
Surging precious metal prices have contributed to a surge in gold and silver demand, which ABC Bullion is seeing across its four showrooms nationwide, as well as in phone-based trading an via our 24/7 investment portal available at www.abcbullion.com.au

Product wise, we’ve seen a real spike in interest for minted tablets, especially 10-gram and 20-gram products made by ABC Bullion.

We are also seeing a spike in activations for the ABC Bullion Gold Saver product, as well as existing users of the product switch to higher silver allocations (the product allows clients to select a mix of gold and silver with their investments), with investors increasingly convinced this next leg of the precious metal bull market will see silver outperform.

ABC Bullion cast bars also continue to sell well, with more investors turning toward the 10oz ABC Bullion silver cast bar, given its lower price point and the trading flexibility that comes with smaller denomination products.

Jordan Eliseo
General Manager
ABC Bullion Australia

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