Gold: Turning points!

In this week's market update:

• Gold prices continued to ease as we head toward the end of the financial year, with the precious metal falling by 1% to USD $1,908 per troy ounce (oz) this week.

• Silver was flat, holding above USD $22.50oz, with the gold to silver ratio (GSR) steady at 85.

• With one trading day to go, the two precious metals are on track to finish the year in the green, with gold (+5%) and silver (+8%) in USD terms.

• Australian dollar prices have fared even better, with gold up 10% and silver up 12%, with a 4% decline in the AUDUSD exchange rate over the past twelve months boosting returns for local investors.

• Elsewhere, commodity prices continued to ease, down 3% on the week, with oil still trading below USD $70 per barrel, while stocks have been flat in the United States.

• 10-year breakeven inflation rates also continue to ease, having fallen back below 2.20%, while 10-year bond yields in both the United States and Australia look set to finish the financial year just below 4%.

Gold to test support as correction continues

Gold prices temporarily fell below USD $1,900 per troy ounce overnight, driven by stronger than expected labour market data in the United States, and GDP results that showed the US economy growing at annualised rate of 2% (vs expectations of just 1.4% growth) in the first quarter of the year.

While gold has bounced back above USD $1,900z at the time of writing, the precious metal remains in a clear short-term downtrend. This is evident in the chart below which demonstrates that gold has so far failed (on three separate occasions) to decisively break through above USD $2,050oz. It is now trading below the 50-day moving average (50DMA) which is currently just above USD $1970oz.

Crucially though, gold is still trading above the 200-day moving average (200DMA) which is currently just below USD $1850oz.

This can be seen in detail in the chart below, where the 50DMA and 200DMA are the blue and red lines respectively, while the spot USD gold price is the thicker gold line.

Source: ABC Bullion, LBMA

In the short-term, it wouldn’t surprise to see gold test support at the 200DMA price level, which would represent a fall of some USD $60, or just over 3% from current price levels.

In the grand scheme of things, a fall of such magnitude (or lack of magnitude in this case), will hardly even show up on the long-term charts, with dip buying investors happy to add to their gold allocations throughout this current correction.

Indeed, if one looks at the above chart, a case can be made that the set up for gold today looks somewhat like what it was back in late 2018. Back then, gold had failed three times to clear what looked like a ceiling near USD $1,400oz, and had fallen below its 50DMA.

History shows it held support at the 200DMA, with the gold price going on to rocket some 60% higher in the year and a bit that followed.

A move of similar magnitude, and in a similar timeframe would see gold heading toward USD $3,000oz by late 2024 were it to be repeated.

Precious metals break even for the year

With one day to go in the financial year, it looks like gold is going to essentially break-even in USD terms, once accounting for inflation. For the year, gold has risen from USD $1,817oz to USD $1,900oz today, a gain of 5%, while silver has risen from USD $20.41oz to USD $22oz today, a gain of 8%.

Given the rise in consumer prices over this period, that more or less puts the precious metals flat in real terms, meaning they’ve maintained their purchasing power.

And while that means gold has lagged risk assets over this period, it, alongside silver, has substantially outperformed the broader commodity complex. As a whole, commodities have fallen by 18% over the last year, led by oil, which has fallen from almost USD $110 per barrel to just under USD $70 per barrel at the time of writing, which represents an annual decline of 36%.

That fall in oil prices has implications for gold going forward, which include:

• The potential for gold to bounce back strongly once recessionary forces begin to get priced into equity markets. The fact that oil has fallen as sharply as it has in the last twelve months is a sign of how fragile the outlook for the global economy is. Despite this fragility, markets have rallied hard, with the S&P 500 up by over the last financial year. While the history books will therefore that equities outperformed gold in the financial year that will finish today, risk/reward favours the precious metal going forward.

• The above point is exacerbated by the inflationary implications of the fall in the oil price. Energy has been a net drag on overall consumer prices in the last year, which is another way of saying that had oil not collapsed the way it has, inflation would be even higher than it is. Once commodity prices stabilise, they will at the least stop detracting from inflation. If they bounce from here, they’ll be another headwind standing in the way of inflation falling back toward the 2-3% level that policymakers tend to aim for.

Given this backdrop, it would not surprise if the recent correction in gold and silver end at some point in the July-September quarter, which also happens to coincide with what has historically been a seasonally strong period for precious metals.

ABC Bullion Precious Metals Forum

Earlier this week, ABC Bullion announced the launch of our 2023 Precious Metals Forum; “Precious Metals to Roar in the 2020s”. The forum will be held at the Ivy Ballroom in Sydney on the evening of Tuesday 22nd August.

The forum will feature several keynote speakers, including both myself and my colleague Nicholas Frappell, Global Head of Institutional Markets at ABC Refinery, as well as a precious metal roundtable.

Over the course of the evening, which will also include canapes and refreshments, we will cover a range of topics, including:

• Retail demand and investor interest in gold and silver since the onset of COVID, and how the pandemic has influenced the precious metal market

• The dominant themes that are driving gold and silver demand today, from bank failures to the return of uncomfortably high levels of inflation and the potential for further volatility in share markets

• The role of monetary policy, how its influencing all asset markets and the macroeconomic backdrop, and why a likely end to the recent tightening cycle will boost gold

• Central bank involvement in the gold market, de-dollarisation and geopolitical risk, and why these factors support the case for precious metals in a portfolio

• Institutional investment into gold, and the role of gold as a highly liquid zero credit risk asset

ABC Bullion Precious Metal Forums are a great way to stay on top of developments in the precious metals market, the opportunities, and risks in the market, and how gold and silver can help to both build, as well as protect wealth.

If you are interested in attending, please visit the forum booking page. Tickets are $35.
 
Inside the office

The last week of the financial year has brought continued buying interest for precious metals, with investors taking advantage of the recent price dip to add to their gold and silver holdings.
Within ABC Bullion stores, including our Global Flagship, we are seeing strong levels of demand for key ABC Bullion gold cast bars, namely the ½ ounce, 1 ounce and 50-gram ABC Bullion gold cast bars.

Silver bars, most notably the 10oz and 1-kilo ABC Bullion silver cast bar also remain very popular, as do Eureka silver coins, and ABC Bullion gold minted tablets.

Online, we continue to see strong demand for pooled metals, including from SMSF trustees, with this area of the market likely to see even more buying once we cross over into the new financial year.

Buybacks of metal also remain at robust levels, with most investors still sitting on good gains, especially if they’ve been long-term gold holders, even if prices have dipped in the last few weeks.

We also expect this turnover channel to remain well supported going forward, especially once this corrective cycle in precious metals is finished.
 

Jordan Eliseo
General Manager
ABC Bullion Australia

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