Gold steady, silver strong as rates keep rising!

In this week's market update:

• Gold prices eased marginally over the last week in USD terms, with the precious metal last trading at USD $1964 per troy ounce (oz), with a rally in the last 24 hours undoing price weakness seen earlier in the week.

• Silver has fared better over the past five trading days, up 3% to USD $24.20oz, with the gold to silver ratio (GSR) declining to 81.

• Equity markets in the US continue to show upward momentum, with the S&P 500 +2%, with technology stocks continuing to drive the market higher.

• Commodity markets were well bid across the week, up 3% across the board, with oil holding above USD $70 per barrel.

• Bond markets continue to sell off, with 10-year bond yields in Australia heading back toward 4%, with the Reserve Bank of Australia (RBA) and other central banks hiking rates again this week to quell persistently high inflation rates.

So much for a pivot

Gold prices rallied sharply overnight, with poor jobs data from the United States reinforcing market expectations of a continued slowdown and potential recession in the world’s largest economy.

The precious metal surged by more than USD $20 per troy ounce (oz) at one stage, with this move enough to offset price weakness seen earlier in the week, with gold essentially unchanged over the past five trading days.

Silver has been on even stronger footing, up a further 3% for the week and again trading above USD $24oz, with the gold to silver ratio (GSR) now sitting at 81, with a potential move below 80 likely to encourage precious metal bulls.

The moves in precious metals and in other markets are occurring against a backdrop of a continued tightening of monetary policy conditions. This includes Canada, which saw another rate hike this week, and Australia, with the Reserve Bank of Australia (RBA) increasing interest rates by another 0.25% earlier this week.

The brings the local cash to 4.10%, with this week’s move representing the 12th increase in just 13 months. In total interest rates are now 4% higher than they were barely a year ago.
There is potentially more to come, with inflation data suggesting prices are still rising at close to 7% per annum, with markets now expecting the cash rate to peak at close to 4.50% by late 2023.

While there is no doubt an eventual pivot will come on the monetary policy front, it has clearly been pushed back, with central banks so far displaying a commitment to getting inflation under control (at least in terms of what they are doing with cash rates), despite the obvious slowdown in the economy higher rates are causing, and the political flak they are taking.

Given these dynamics, it may well not be until much later this year that we see central banks hit pause on rate hikes, and not until 2024 that we see rates start to ease. Markets will no doubt get ahead of these moves, with an easing cycle likely to put downward pressure on the US dollar, which typically provides support to bullion, with analysts at Citi seeing gold head toward USD $2,200oz.

Monetary policy pivots aside, one of the other key discussion points for market commentors in recent times has been the debate surrounding the US debt ceiling, and whether or not powerbrokers in Congress and the White House would be able to reach agreement on increasing the amount of money the United States Federal Government is allowed to borrow.

Given this process has happened 78 times in the past sixty years, and has a 100% success rate (i.e. the debt limit is always increased) there was always little chance this time would end with a different outcome.

From a market perspective, history suggests gold may see a decent bounce once this ‘crisis’ is formally put to bed, with the below chart from a recent World Gold Council update highlighting how gold and equities performed when we saw a similar scenario play out back in 2011.

As the chart highlights, gold rose by the better part of 15%, while risk assets fell by a similar amount.

Those kind of performance differentials are commonly seen in periods of equity market weakness, with gold’s protective qualities almost certain to come back to the fore in due course.

Supply surprise

Since the spike in inflation that we have seen hit the developed world in the aftermath of the COVID-19 pandemic and the attempts to limit its spread first hit, most commentators have been at pains to point that it has mostly been supply driven.

The argument was not, and indeed to this day is not without merit, as shutting down manufacturing capacity, as well as the logistics companies required to make global supply chains function smoothly could not help but cause upward pressure on prices.

The problem has come from thinking its only supply side factors causing inflation to surge, as supply side shocks began to dissipate some time back. This is evidenced through global shipping rates, which have fallen the better part of 90% in the last two years (from a peak of $11,109 in Sep 2021 to just $1,380 now).

For further evidence of how much supply side pressures have dissipated, consider the chart below, sourced here. It shows an index created by the New York Federal Reserve which is designed to track stresses in global supply chains by looking at transportation cost data and manufacturing indicators.

According to the Fed’s latest update, this index is now showing a reading of -1.71, after peaking at more than 4.30 in late 2021 (about the time shipping rates were peaking), with the New York Fed going on to note that “readings for all regions are below their historical averages”.

The chart also demonstrates that sharp falls in this index tend to occur alongside recessionary periods (marked in red).

Suffice to say this is another warning sign for investors, and another potential reason to turn to trusted safe havens like gold as a wealth protector given the uncertain environment ahead.

Central Banks trim gold holdings

Central Bank gold demand has been a key focus of the precious metal community in recent times. This is not surprising given the record demand we saw in 2022, when more than 1,000 tonnes of the precious metal were acquired by nation state buyers, a record sum that dwarfed the previous record for buying in any given calendar year.

Given the air-time this buying has received, it came as a shock to some observers to see that central banks had, on a net basis, trimmed gold holdings in April. Indeed, this news, which was released earlier this week no doubt contributed to the currently lukewarm sentiment toward gold that can be observed in the marketplace.

Further inspection of the news though shows that those who believe gold is on the cusp of a major bull market have little to fear from the net selling seen in April, with Turkey the one nation state that drove this outcome.

The World Gold Council made this clear when they noted that; “The Central Bank of Türkiye reported a decline in its official gold reserves of 81t, reducing its total gold reserves to 491t. Our analysis, based on published data and in-market conversations, indicates that this was a specific response to local dynamics rather than a change to their long-term gold policy: the gold was sold into Türkiye's domestic market to satisfy very strong bar, coin and jewellery demand following a temporary partial ban on gold bullion imports.”

Other nation states remained net buyers, including Poland who added another 15 tonnes to their holdings, while the People’s Bank of China added a further 8 tonnes, with this increase representing the sixth consecutive month their total gold holdings have risen.

Given this detail, it looks like the net selling of gold reserves seen in April will come to be seen as a blip on the radar. Given the broader macroeconomic, monetary and market backdrop, as well as the geopolitical environment, these institutions are likely to remain buyers for years to come, with consultancy Metals Focus predicting that as a whole central banks will add 600 tonnes of gold to their reserves across the course of 2022.

That might be a step down from the record high seen last year, but it does not change the fact that this net buying is likely to be one of the many factors that will support bullion prices going forward.

Inside the office

While the big picture reasons to own precious metals in a portfolio have driven, and indeed continue to drive the increase in gold and silver holdings in investor portfolios, there is no doubt that short-term price movements (in either direction) are a key determinant of precious metal demand.
 
When prices move to the upside, it can act as a jolt to those who’ve been thinking of allocating to gold to finally pull the trigger, while earlier adopters often use those periods to cash in some profits, a trend that has been evident for most of the year at ABC Bullion given gold’s surge toward AUD $3,000oz.
 
When prices drop, as they have recently, we often see a wave of bargain hunting, both from existing investors looking to boost holdings, and those who have been waiting for a dip to make their first allocation to the metal.
 
The recent pullback in gold and silver has seen this trend reassert itself at ABC Bullion, with 1oz ABC Bullion gold cast bars, 50-gram ABC Bullion gold cast bars, 10oz ABC Bullion silver cast bars, and 1oz ABC Bullion Eureka silver coins seeing substantial buying interest.
 
Online, we continue to see investors picking up 1kg ABC Bullion silver cast bars, while pool allocated metal demand and activation of ABC Bullion Gold Saver accounts remain at robust levels.

Warm Regards,

Jordan Eliseo

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.