Gold spikes as inflation tumbles

In this week's market update:

• Gold prices rallied strongly this week, with the precious metal +3% in USD terms, last trading at $1,960 per troy ounce (oz).

• Silver was even stronger, last trading at USD $24.90oz, +7% on the week, with the gold to silver ratio (GSR) dropping to 79.

• Currency markets were volatile, with the US dollar index -3%, and falling below 100, while the Australian dollar was up by 2%, and looking like it might push toward USD $0.70.

• Commodity prices, cryptocurrencies, and equities bounced, led by oil, which was +7% on the week, with the recent dip below USD $70 per barrel now looking like a meaningful bottom.

• Bond yields gave up some of their recent increases, falling by 25 basis points in the US and Australia.

• Inflation was the key driver of market moves across the week, with the latest data from the United States suggesting prices rose by just 3% in the year to the end of June.

Was inflation transitory after all?

Precious metal prices soared this week, with the price of gold and silver rallying by 3% (gold) and 7% (silver) in USD terms. The move higher has wiped all the previous losses that gold was sitting on in terms of monthly performance, with gold and silver now +14% and +31% respectively over the last year.

That is quite some performance given equity markets are higher, yields have soared, monetary policy has become more restrictive, and the broader commodity complex has weakened.

One of the key drivers of this week’s bounce in precious metals was of course the release of headline inflation results in the United States, which showed that on a rolling 12-month basis to the end of June, consumer prices rose by just 3%.

The chart below, sourced from the Financial Times here, shows how inflation in the United States has evolved since early 2019, with the headline CPI represented by the black line, while some of the major subcomponents (energy, housing, etc) are represented by the coloured stacked column bars.

The above chart has both good and bad news as it relates to inflation. The good news is obvious, in that headline inflation has dropped substantially, and is now at a far more comfortable level of just 3% per annum.

The challenge is that some of the stickier parts of the inflation basket (housing, core services, food) are still running at a combined inflation rate between 4-5%.

What is even more problematic is that energy has been a clear detractor from inflation in the last few months. If oil stabilises, let alone begins to rise again as it has in the last fortnight, what has been a tailwind pushing inflation lower for much of the last year will turn into a headwind.

This cannot help but complicate the stated desire of policymakers to return inflation to target ranges of 2-3% per annum, and it is also why it remains too early to claim definitively that the last two years represent a one-off, or transitory, increase in inflation.

Given markets are still pricing in inflation rates to average just over 2% per annum for the next decade, there remains much more room for inflation to overshoot relative to expectations, rather than undershoot.

These dynamics will likely prove to be hugely supportive for both gold and silver in due course.

Young vs old. Crypto vs Gold

Across the course of the last decade, there has been a growing chorus of investors that are interested in cryptocurrencies, the highest profile of which is Bitcoin.
While most investors understand that cryptocurrencies are highly speculative and full of risk (and therefore nothing like gold), there are some who continue to push the narrative that Bitcoin is ‘Gold 2.0’ or ‘digital gold.’

This narrative has come back to the fore in recent times, driven in part by the recovery in the Bitcoin price, which is up circa 100% from its lows, though still down well over 50% from its highs, as well as news that organisations like Blackrock are looking to launch Bitcoin ETFs in the United States.

One of the arguments that is often used to advocate for Bitcoin in favour of gold is a comparison of investment trends across age groups, with young people typically preferring cryptocurrencies like Bitcoin, while older investors tend to favour precious metals like gold.

Charts like the one below, which comes from a Nielsen Homescan Panel survey of more than 80,000 households would seem to validate, or reinforce this view that gold is an investment for older people.

At a surface level, this would appear to pose a problem for gold going forward.

We for one are not convinced by this argument.

Most young people today are not interested in health insurance or retirement planning. Inevitably, that will almost certainly change for most people given the passage of time.

We think it’s much the same for investing in gold and cryptocurrencies and that the above chart is the logical outcome of the fact that.

• Older people tend to have much larger pools of wealth they have built across their working lives, which they have a keen interest in protecting or insuring.

• Young people have had minimal chance to build wealth. They therefore have little interest in protecting that which they do not yet have but are willing to speculate to build it.

As a result, we are quite confident that many people that are cryptocurrency investors of today will become the precious metal investors of tomorrow.
 
Dollar dive to drive gold toward USD $2,500 per ounce?

The ABC Bullion Precious Metals Forum: “Gold & the Roaring 20s” is set to be held on Tuesday 22nd August at the Ivy Ballroom Sydney, which is just over a month away. One of the key topics we will be talking about is de-dollarization.

While the term de-dollarization may mean different things to different people, it in part reflects the potential for large and economically powerful nations to increase their holdings of non-USD related assets and conduct and settle trade in currencies other than the USD.

While it is likely largely unrelated to the de-dollarization narrative, there is no doubt the USD itself is showing substantial signs of weakness, with the below chart highlighting how far it has fallen in recent times.

As @Callum_Thomas of TopDown Charts, who shared the above chart on twitter highlighted, the USD appears on the cusp of a major breakdown.

If that does indeed transpire, it would likely be supportive for the overall commodity complex, problematic for those hoping inflation will continue to fall away, and very bullish for gold and silver.

The ABC Bullion precious metal forum, where topics like the outlook for the USD, and why weakness in the greenback could help drive gold toward USD $2,500oz, promises to be a great evening for anyone who already holds precious metals in their portfolio, or may be looking to do so.
 
If you are interested in attending, please visit the forum booking page. Tickets are AUD $35, and on behalf of the whole ABC Bullion team, we look forward to welcoming you there.
 
Inside the office

We continue to see strong levels of turnover at ABC Bullion, with investors looking to add precious metals to their portfolios in the new financial year.

As always, this is being driven by both new investors, who are buying gold and silver for the first time, as well as longer-term holders, many of whom are buying through self-managed superannuation funds (SMSF), with our recently released ABC Bullion 2023 SMSF investing guide highlighting key factors driving both gold and silver demand in Australia.

Within our global flagship store at 38 Martin Place, ½ oz ABC Bullion gold cast bars and 1 kilo ABC Bullion silver cast bars remain amongst our most popular products, as do 10-gram ABC gold minted bars and our range of silver coins.

We are also seeing strong levels of buybacks from customers, with many locking in some long-term profits. We expect to see this trend continue, especially if gold can reclaim USD $2,000 and AUD $3,000oz, and then go on to new all-time highs in this bull market cycle.

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.