Gold stabilises as inflation cools

In this week's market update:

• Gold prices were essentially unchanged across the course of the past five trading days, holding above USD $1,950 per troy ounce (oz).

• Silver fared more positively, adding another 1%, last trading near USD $24oz, with the gold to silver ratio (GSR) falling to 82.

• Risk assets were mixed, with Bitcoin continuing its recent fall (-4%) though equity markets were more positive, with the S&P 500 up by 3%, while in Australia the ASX has rallied by 1%.

• Fixed income markets were steadier this week, with 10 year government bonds yields in Australia holding just below 4%, while in America they continue to trade just below 3.75%.

• Inflation and interest rates were again the dominant drivers of market activity and commentary, with headline CPI in the United States continuing to decline, while the US Federal Reserve kept interest rates steady, in a move that was fully priced in by markets.

Pause vs Stop - have rates peaked?

Precious metal prices were largely steady over the past five trading days, with gold flat, trading just above USD $1,950oz, while silver eked out another 1% gain in USD terms, last trading just below USD $24oz.

In Australian dollar terms, the prices of both metals were down (4% for gold and 2% for silver), with this correction driven by the recent surge in the value of the Australian dollar, which climbed to USD 0.689 this week, up 3%.

The biggest news of the week came from the United States, with two key factors dominating market attention. One of these was of course the release of inflation results to end May (more on this below), while the other was the highly anticipated pause from the US Federal Reserve, who kept interest rates steady at 5-5.25%, after more than a year of consecutive interest rate increases.

While some market participants believe this pause will mark the top of the interest rate cycle, the Fed itself doesn’t agree, with chair Jerome Powell noting that; “Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year."

Higher rates are also likely on the way in Australia, with the latest unemployment data suggesting the jobless rate has fallen to just 3.6%, while labour force participation is at a record high.

Alongside the recent bounce in house prices, and still high inflation, this data will likely prompt the Reserve Bank of Australia to hike again, potentially as soon as July. Locally, markets are now pricing in a peak cash rate of just over 4.60%, which implies another 0.50% of tightening across the course of 2023.

How low will US inflation fall?

Investors were celebrating this week, as US inflation data continued to fall, with year on year price rises now coming in at 4% in the year to end May.

While that is still double the level policymakers aim for, it’s a huge decrease in the pace of price increases given headline inflation was running at more than 9% per annum in the middle of 2022.

Pleasing as this decline is, there are signs that getting inflation down to 2% will still be a huge challenge, given:

• Core inflation is still running at 5.3% per annum

• Trimmed mean inflation last came in at 5.5% per annum

• Median inflation is still above 6.5% per annum

• Services inflation is at 3.7% per annum

It’s also worth noting that energy is currently sitting at -1% given recent price falls, which can be seen in the orange bars on the chart below (which show various contributors to inflation over time, with services the dark blue line).

The energy component of the inflation basket could well become more problematic if oil (which is down 40% over the past year) and other commodities even stabilise, let alone begin to rise.

Given the above dynamics, while it’s only taken a year for inflation to drop from 9% to 4%, it may take a lot longer for it to drop from 4% to 2%, if indeed it can get there at all.

As such, markets still have a major inflation challenge on their hands, especially given markets have already prices in inflation continuing to fall away, with a range of 5 to 10-year inflation measurements suggesting prices are only expected to rise by somewhere between 2.15% and 2.30% per annum in the years to come.

Gold at risk, but set to emerge

Charlie Morris of Bytetree recently released some updated commentary on the gold market.

The update included plenty of long-term charts which highlight what is going on in the precious metal market, from central bank buying of gold to the major contributors to inflation right now to federal debt repayments in the United States, and the parlous fiscal state Washington finds itself in.

His article also included the following chart, which looks the movements in the gold price since the 1970s, and movements in the real rate environment over the same time period. The chart makes it clear that it’s typically periods of declining real rates in which gold thrives, while higher real rates (which we’ve seen lately) often cause gold to struggle.

Given the opportunity cost of holding gold, it’s no surprise that movements in real rates are a major factor driving the USD gold price, with gold potentially at risk in the short-term if real rates continue to push higher.

That said, we’ve already seen a huge increase in real rates over the past two years, which implies that this key driver, which has been a headwind for the precious metal for much of the past two years, will soon dissipate.

When that happens, gold may well again surge, with consumers in emerging markets already showing a huge appetite for the precious metal, both as an investment in bar and coin form, and as an ostentatious display of wealth through jewellery form.

This demand can be expected to grow, given the following profile of emerging markets, which Charlie alluded to in his update; “emerging markets account for 87% of the global population, 76% of the total land area, 44% of global GDP (up from less than 20% in 2000), 76% of global GDP growth over the past 20 years”
Charlie also commented on emerging markets as gold buyers at a nation state level, noting that these economies account for 76% of global foreign exchange reserves, with the following nations increasing their gold holdings.

• Egypt                                 47 tonnes

• Qatar                                 35 tonnes

• Uzbekistan                        34 tonnes

• Iraq                                    34 tonnes

• India                                  33 tonnes

• United Arab Emirates        25 tonnes

The list goes on, with the above obviously not including heavyweight buyers like China and Russia.

Given the strength of this buying demand and the growth of economic power across emerging markets as a whole, it’s clear that the gold market continues to have very strong underpinnings.

Inside the office this week

Physical precious metal turnover remains healthy as we head toward the end of financial year in Australia, with investors continuing to accumulate holdings through ABC Bullion.

As always, signature products like ABC Bullion 1oz cast gold cars and ABC Bullion 1oz silver Eureka coins continue to sell well, while for many SMSF trustees and investors making larger allocations, pool allocated metals remain the investment of choice.

We’ve also seen solid demand for ABC Bullion minted gold products, and an uptick in platinum buying in recent times. The latter is being used to diversify precious metals exposure, and potentially buy a precious metal ‘on sale’ as it were, with platinum looking very cheap relative to gold, at least based on historical ratios.

On the opposite side of the equation, client sales of metal have eased back somewhat in the past week. This is not surprising, given this easing is from near record levels of client sales seen earlier in the year and the recent pullback in Australian dollar gold, which is now down almost AUD $200oz (-7%) from the highs seen in early May, when gold traded above AUD $3,050 for the first time ever.

The ABC Bullion 1oz Gold 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.