Precious metals bounce back as silver set to surge!

In this week's market update:

• Precious metal prices were strong across the board this week, with both gold and silver rallying by 2% in USD and AUD terms.

• The strength in precious metals, which has seen gold trade back above USD $2,050 per troy ounce (oz) and silver back above USD $23oz, has occurred against a backdrop of falling bond yields, with 10-year treasuries now yielding just 3.99%.

• Equity markets were more static over the past five trading days, with the S&P 500 unchanged, while Bitcoin has bounced, last trading above USD $42,000.

• Commodity markets (excluding precious metals) continued to soften, with oil falling below USD $75 per barrel, with the overall sector -1% over the past five trading days.

Signs of a bottom in silver as market rallies:
Precious metal prices moved sharply higher this week, with both gold and silver rallying by 2% in USD terms, with gold currently trading above USD $2,050oz. The move higher has occurred against a backdrop of falling bond yields, with expectations the US Federal Reserve (the Fed) will deliver a slew of interest rate cuts in 2024, with the Fed dropping their tightening bias at their just concluded January meeting.

And while most market commentary surrounding the Fed and the impact of their decisions on the precious metal market tend to focus on gold, silver is looking just as if not more interesting, with signs the market is set to move higher.

This view was perhaps most succinctly articulated by commentator Bob Coleman, who a few days noted that the Commitment of Traders report for silver showed that managed money positioning was net short by late January.

This is a rare occurrence and is a sign the market may be in the process of bottoming, or has indeed already bottomed, with net short positions typically only occurring at important turning points in the market for both gold and silver.
 
In the news this week:

• HSBC Chief Economist Paul Bloxham has stated commodity markets are facing a potential ‘super squeeze’, driven by both supply constraints and higher demand, with tension in the Middle East, climate change risk, onshoring and green energy investments combining to put upward pressure on prices. That will complicate any attempts to push inflation down and should support demand for precious metals.

• Gold itself looks bullish from a charting perspective, with a more than ten year cup and handle formation suggesting the market may soon break to the upside. The fact that gold ended last year trading at all-time highs on a weekly, monthly, and quarterly basis, and the continued strength in early 2024 only reinforces the positive outlook for the metal.

• Precious Metal analyst Ross Norman released an outlook for precious metal prices in 2024, which suggests prices could head toward USD $2,300oz, while silver is forecast to hit USD $28oz. Catalysts for gold include the fact this year should see rates come down, and still strong central bank buying (more on this below), while for silver, a decline in mine supply and a boost in industrial demand are expected to provide support.

• In Australia, the outlook for growth remains troubled at best, with retail sales plunging in December (-2.7% month on month, with real volumes -3%). The suggestion is that more than 400 basis points if rate hikes in recent times have in essence “crashed the economy”, with Australia already experiencing a per capita recession, and one that is likely to get worse before it gets better.

That last point has important implications for Australian investors, including clients of ABC Bullion who own precious metals, with the Australian dollar typically seeing large declines in recessionary periods.

Should similar price action transpire in the months ahead, it will add another tailwind helping to push gold and silver prices even higher in Australian dollar terms.

Chart of the week:
Central banks have always been major players in the gold market, holding the precious metal as a reserve asset, portfolio diversifier, and source of liquidity. Since the Global Financial Crisis hit some 15 years ago, they’ve been busily adding to their stockpiles, with total holdings increasing every year.

The pace at which they’ve been accumulating has increased in recent times. This is evidenced in the chart below, shared by The World Gold Council’s Krishan Gopaul, which shows that more than 1,000 tonnes has been bought by these institutions in each of the last two years, with net purchases in excess of 7,500 tonnes since 2010.

The continued strength in central bank demand was something of a highlight for the gold market in 2023, with the World Gold Council noting in their just released Gold Demand Trends report for Q4 of last year that overall investment was down 15%, hitting a 10-year low of 945 tonnes.

The ETF market was the major culprit in this regard, with outflows of almost 250 tonnes in 2023, while overall bar and coin demand was down 3%, despite a surge in Chinese buying, which came it at almost 280 tonnes for the year.

The uplift in Chinese buying stands in stark contrast to what we saw in more developed markets, with total bar and coin demand in Europe and the United States dropping to 240 tonnes in 2023, down from just over 420 tonnes in 2022.

That gold prices are still above USD $2,000oz in the face of such a headwind is testament to the importance of central bank demand, and suggests we could see an explosive move higher, once the less sticky ends of the gold market (futures market speculators and ETF buyers) return on the buy side.

Inside the office:
ABC Bullion has seen a notable uptick in trade volumes since the start of the year, with Australian’s returning from holidays, and pending Lunar New Year celebrations leading to healthy levels of demand for both precious metals.

Gold is as usual leading the way, with investors looking to set up a saving plan for the new year activating Gold Saver accounts, with turnover in this product alone up by more than 30% relative to one year ago.

Pool allocated and cast bar investments also remain incredibly popular, especially for HNW investors and SMSF trustees wanting to hold gold as part of a diversified portfolio.

Lunar products are also seeing strong demand, most notably our 1oz ABC Bullion Gold Lunar Dragon and 1oz ABC Bullion Silver Lunar Dragon.

Buybacks of precious metals also remain at near record levels, with long-term investors taking advantage of an AUD gold price in excess of $3,100oz to lock in profits.

Jordan Eliseo
General Manager
ABC Bullion Australia

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