New highs for gold before market consolidates

In this week's market update:

• Precious metal prices surged earlier in the week, with an escalation in tensions in the Middle East seeing gold at one point trading above USD $2,100 per troy ounce (oz).

• The market has since consolidated, with gold last trading just below USD $2,030oz, essentially unchanged week on week.

• Silver has had a tougher week, falling by 5% in USD terms, last trading at USD $23.80oz, with the gold silver ratio (GSR) climbing to 85.

• Equity markets were relatively stable, with both the S&P 500 and the ASX 200 +1% over the past five trading days.

• Overall commodity prices have been one factor impacting silver, with a basket of commodities falling by 4% in the last week alone, while oil has cratered, off by 9% and now back below USD $70 per barrel.

• Bond markets have continued their recent rally, with 10-year government bond yields in Australia and the United States falling by 0.22% and 0.15% respectively.

Market Dynamics Favour Gold!
The gold market started this week on extremely strong footing, with news of a Houthi rebel attack on a US Warship in the Red Sea causing the precious metal to temporarily spike above USD $2,100oz, a new all-time high.

While gold has since given back those gains, it is so far on track to deliver another year of solid returns to investors, having rallied by 12% in USD terms in 2023.

Moving on from the short-term price action, and while it is natural for investors to focus on the local case for gold, as well as US centric news stories about the US Federal Reserve or the latest movements on Wall Street, it pays to remember that the largest consumer/household investor markets for gold are in China and India, with huge demand also seen from central banks.

On that note, the latest data from the World Gold Council (WGC) is highly encouraging, with central banks continuing to accumulate gold during October, adding just over 40 tonnes added to reserves.

On a calendar year basis, we are likely to see net buying of 400 tonnes or so, with the chart below (also from the WGC) highlighting net purchases or sales on a year-to-date basis, with China clearly leading the way.

It’s not just the People’s Bank of China buying either, with a fascinating article out this week highlighting that overall demand for gold in China is also being heavily driven by younger investors, many of whom have seemingly fallen out of love with their local property markets.

This news out of China demonstrates that the physical market for gold will likely see a continuation of the strong demand trends that been in place for years.

The question is when Western investors will return to the gold market en-masse, with this segment of the market notoriously quiet in 2023, despite prices surging to all-time highs.

On this score, it appears the tide is beginning to turn, with further WGC analysis suggesting outflows from gold ETFs narrowed in November, with money actually flowing into products in the United States.

To be clear, there is still money coming out of gold from this sector (total holdings have fallen by 7% in 2023), continuing a trend that has been in place for the better part of three years now.
But was once a flood has become a trickle, suggesting the dynamics in this sector of the market are also beginning to turn in gold’s favour.

In truth, this should not be a surprise, given the very clear case for gold that exists, many of which were captured in a recent Baker Steel research piece, which we found fascinating.

Their article focused on the gold market, and not only accurately captured recent drivers and gold price performance, but also many of gold’s longer-term investment attributes.

The Baker Steel piece also spoke of the current dynamics at play in the gold market, and why Fed rate cuts, when they do eventually arrive, can be expected to very supportive of higher bullion prices.

Starting with a brief look backward, which served to add context to the current price action, Baker Steel noted that: "Since hitting its all-time high at the height of the COVID pandemic in the summer of 2020, gold has defied a range of negative market forces and traded between USD 1800-2000/oz for most of the past three years, while re-testing its high three times. This robust performance has been achieved despite the sharpest US interest rate hiking cycle in a generation and with the US dollar hitting a two-decade high. Importantly, gold has continued to make new highs in many other major currencies, including the Euro, Sterling, and Australian and Canadian dollar, during this period.”

Baker Steel also stated that: “Gold has largely fulfilled its traditional role in recent years, protecting purchasing power in the face of rampant inflation, and withstanding the headwinds of rising real interest rates and surging US dollar strength” before going on to note that; “A major macroeconomic shift appears to be underway as the US rate hike cycle turns, inflation fades, and economic risks rise. Historical precedent indicates a strong period ahead for precious metals”.

Baker Steel went on to state four key reasons why now is a great time to be looking at gold, noting that:

• Gold tends to perform well amid economic and geopolitical uncertainty -Economic risk is rising in the US under the “higher for longer” interest rate scenario. Confrontational geopolitics will likely continue**.**

• De-dollarisation is gaining traction – The US share of global trade is retreating, US debt growth is accelerating, and many emerging market central banks are reducing US treasury holdings.

• Physical gold demand is robust - Gold jewellery consumption continues to recover from COVID lows amid higher local prices (e.g. yuan, rupee), while central bank buying may reach another record high in 2023.

• The end of US rate hike cycles historically pushed gold to new highs – In the past three cycles, gold rose >50% in the aftermath of a “pause” in hikes. Conviction is building that the US Fed has finished.

The chart below is evidence of the final bullet point, with movements in interest rates plotted in the dark blue line, while movements in the USD gold price are also visible.

A return of similar magnitude would see gold rally toward USD $3,000oz, and likely AUD $5000oz in such a circumstance.

The evergreen case for gold
The excellent research piece from Baker Steel, gold’s recent spike above USD $2,100oz, and the broader macroeconomic and investment climate in which it has occurred are a timely reminder of some of the more evergreen reasons to incorporate the precious metal into a well-diversified investment portfolio.

Many of these reasons are highlighted in our annual ABC Bullion Gold Infographic, which discusses:

• The strong long-term capital growth gold has generated.

• How gold is an effective hedge against inflation

• The benefits of gold’s exceptional liquidity

• Gold’s outperformance in periods interest rates are rising.

• How gold provides portfolio protection when its needed most, often rising substantially in periods risk assets fall

The last of the above bullet points is illustrated clearly in the chart below that shows the average return for the stock market in the months, quarters, and years it declines, as well as the average return generated by gold in these time periods.

While the recent price action in gold and silver has been very pleasing for precious metal bulls, and there is a strong likelihood that there will be more upside in the months and years ahead, it is the above factors that will drive longer-term allocations to gold and precious metals going forward, with gold in particular offering many benefits to more traditionally constructed portfolios.

Pod of Gold
My colleague Nicholas Frappell, Global Head of Institutional Markets at ABC Refinery, has released another outstanding Pod of Gold, record this week on the 5th December.

The podcast as usual covers a range of topics, including the gold move to a new all-time high, the subsequent correction, and what short-term price targets its worth paying attention too now that the volatility appears to have subsided.

Nick also discussed why economic data out of the United States, which is set to be released this week, will play a key role in determining the outlook for markets and policy as head into 2024 and what the infamous Taylor Rule says about the US Federal Reserve and their current interest rate settings.

Timestamps:

• 00:00 – Intro

• 00:55 – Gold hits a high

• 01:20 – What drove gold higher?

• 04:25 – The data driving the gold price.

• 06:02 – Gold managed money positioning

• 09:00 – Strong rotation into gold

• 10:42 – Gold’s next price levels (P & F)

• 13:30 – Technical setup for gold

• 15:02 – Are rate cuts coming?

• 19:43 – Bullish on gold

Inside the office this week
The spike in the gold price that was seen earlier in the week has also led to a surge in trading volumes, with investors continuing to move a portion of their wealth into precious metals.

This has included demand from a range of clients, from retail investors perhaps buying a 1-ounce ABC Bullion gold cast bar or 1-kilo ABC Bullion silver cast bar (our two signature products), through to HNW and wholesale clients buying large volumes of 1 kilo ABC Bullion gold cast bars.

Online, we continue see very strong demand for pool allocated products, as well as feature products like the 1oz Krugerrand silver coin and 1oz ABC Bullion Platinum minted tablets, which we are offering with reduced premiums.

Across our four locations Australia wide, including our Global Flagship at 38 Martin Place, we are also seeing a huge uptick in demand for ABC Bullion gold minted tablets, which are being bought as both an investment and a gift, with Christmas fast approaching.

Jordan Eliseo
General Manager
ABC Bullion Australia

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