No signs of a gold bubble!

In this week's market update:

• Precious metal prices were in consolidation phase over the past five trading days, with gold off 1% in USD terms, with prices last sitting at USD $2,005 per troy ounce (oz).

• Silver was also off 1%, though is still trading above USD $25oz, with the gold to silver ratio (GSR) falling to 79.

• Equity markets continue to grind higher, despite growing headwinds for the US and global economy.

• Commodities sold off notably, led by oil, which fell by 6% over the past five trading days, while Bitcoin was off by 7%.

• Yields continue to retrace some of the falls seen from early March onwards, with US and Australian 10-year government bonds again trading near 3.50%.

Reasons to own gold keep building

Gold and silver prices are in consolidation phase at present, with the two precious metals holding above USD $2,000oz (gold), and $25oz (silver) despite a sell-off earlier this week that at one point saw gold head back toward USD $1,970oz.

That sell-off so far looks like a short-term blip, with the precious metal in essence recovering all those losses at the time of writing. The same can be said for silver, which remains above USD $25oz, with the GSR continuing to fall, a sign that will encourage precious metal bulls.

Short-term, trade in the two key precious metals remain may remain choppy, with some investors understandably likely to take profits with gold above USD $2,000oz, while silver will also find sellers at current levels.

Longer-term, and the picture grows more favourable by the day, with there being no shortage of factors which should provide support for precious metal demand, and therefore prices.

On the inflation front, there are growing signs it will not fall as fast as policymakers hope, with UK consumer prices continuing to rise at more than 10% per annum, above market expectations.

In the United States, we see a continued deterioration in economic conditions, expressed most recently through the below chart of the Philadelphia Federal Reserve Manufacturing Index.
As the chart highlights, sharp declines in this index often coincide with recessions, with data since the 1970s suggesting that every time this index has dropped to -20 or below (it is currently -31.3), the United States has gone on to experience a recession.

The heightened chance of a recession almost certainly means the US Federal Reserve will need to at least stop hiking interest rates, and indeed begin to cut them.

On that score, there has been no shortage of commentary from Fed speakers themselves in recent times (see table below shared by @RonStoeferle), with an overall theme that interest rates are likely close to their peak.

Should we soon see rates peak, and a recession play out, one would not be surprised to see another surge in gold demand, with gold prices to perform well.

ETFs and the Gold Market

While ABC Bullion specialise in physical bars and coins, pooled metals and savings plans like the ABC Bullion Gold Saver, we often look to the gold futures and ETF market, as they provide great insight into investor behaviour, and how popular (or unpopular) gold may be at certain times of the investment cycle.

To that end, the below charts, shared by @CallumThomas of TopDown charts, are highly instructive. They show the percentage of the total assets held in the US ETF market (by this we mean ETFs for all asset classes) that are made up by gold ETFs, and by gold mining company ETFs.

There is clearly no sign of a bubble in gold, with the precious metal currently comprising less than 2% of the total ETF market in the United States, versus closer to 8% just over a decade ago.

As Thomas himself noted in a post from early April;” With gold making yet another attempt at breaking out through that all-important US$2000 level, it’s worth reflecting on this pair of charts. Firstly, as discussed in the latest report, gold has been (and likely will continue to be) boosted by falling bond yields and a weaker US dollar. From a technical standpoint it has so far managed to hold onto the $2000 level and has seen its 200-day moving average turn up with strong cross-currency breadth.

The macro and technical momentum is there, and positioning/flows/sentiment still has ample room to run on our metrics despite the recently renewed enthusiasm as gold has already rallied some 25% off the lows.

But it does beg the question as to whether new gold bulls have already missed the boat. And then you look at these two charts... investor implied allocations to gold (based on ETF market assets) remain well below long-term average, and well below the gold bull market years. It’s equally intriguing and informative for gold stocks — which are arguably also under-owned.

Remember, while most think gold is an inflation hedge, it’s actually going to be best placed in an environment of falling inflation …especially recession, because that’s going to be a scenario where monetary conditions ease (lower bond yields, pivot in Fed policy from tightening to easing, weaker USD), and gold gains.

We couldn’t agree more.

US dollar decay and the rise of gold

Gold’s role as a premiere international currency has never been in doubt, at least not amongst those who analyse central bank reserve, and their statements over the various years regarding the various assets they hold.

In the years to come, gold’s role as a reserve asset looks set to strengthen, if for no other reason than;

1. Reliance on the USD is waning (from a very high-level mind you) and

2. There is no other fiat currency the market will readily accept in place of the USD.

For evidence of point a, consider the following article, which quotes research from Eurizon SLJ Asset Management. They note that while there has been gradual erosion in the role of the USD over the last two decades, the speed of that erosion has intensified in the last year, with the share of global reserves made up by USD dropping from 55% in 2021 to just 47% by 2022.

Little wonder central bank’s have been on a gold buying spree, evidenced through the below chart shared by John Reade, the Chief Market Strategist at the World Gold Council.

The chart shows more than 1,000 tonnes of gold was bought by this sector of the market in 2022, by far the highest number seen for any given calendar year.

Inside the office

ABC Bullion continues to see near record levels of demand across our four state offices, including our Global Flagship store at 38 Martin Place Sydney.
 
Activations of our ABC Bullion Gold Saver account have been particularly strong in the last month, with the value of investment into this product surging by almost 50% in the last month.
 
In store, we have seen a noticeable trend toward smaller cast bars, including the 10 ounce ABC Bullion silver cast bar and the ½ oz ABC Bullion gold cast bar. Silver coins are also selling in bulk, while we continue to see good two-way trade with some investors choosing to liquidate part of their bullion holdings into the recent price strength.  
 
Warm regards,

Jordan Eliseo
General Manager 
ABC Bullion