Precious metals correct as markets tank!

In this week's market update:

• Precious metal prices fell sharply this week, with gold -4% in USD terms, last trading at USD $2,364 per troy ounce (oz), while silver last traded at USD $27.80oz, a -9% move in the past five trading days.

• Returns in Australian dollars were more moderate, with a 3% fall in the value of the Australian dollar vs the US dollar seeing gold in AUD last trade at AUD $3,611oz (-1% for the week), while silver was -6% to AUD $42.50.

• The sharp pullback in precious metal prices transpired against a backdrop of broader market weakness, with the S&P 500 in the United States down by 3%.

• Commodity prices were also hit, with oil falling 3% and back below USD $80 per barrel.

• Bond yields also continued to rise, with US 20-year treasuries falling by 1%.

Buying opportunities as gold and silver fall
Precious metals sold off sharply this week, with gold (-4%) and silver (-9%) witnessing one of their sharpest pullbacks on record, after a strong six months to start 2024 that has seen both precious metals rise by more than 20%.

Returns in AUD were also negative, though a 3% fall in the AUD (last trading at USD $0.655) mitigated the downside, with gold now sitting at AUD $3,611oz, while silver last traded at AUD $42.50oz.

While the sharp decline may have caught some investors by surprise, context is important, with most markets selling off aggressively this week, with the S&P500 down 3% over the past five trading days.

This weakness, which has been concentrated in tech heavy end of the market, has seen the US equity market shedding hundreds of billions in value this week, even as market commentators, including those that had previously held a hawkish view on monetary policy, suggest the US Federal Reserve could begin their rate easing cycle in August.

As we highlight in our chart of the week section below, the risks in equity markets may only just be coming to the surface, with a strong likelihood that we see further volatility going forward.

Should equity market weakness prove to be more prolonged, the current pullback in precious metal prices will almost certainly be temporary, and for many will be seen as a buying opportunity for gold and silver investors to take advantage of.

In other precious metal related news this week, we have seen:

• Analysts at Goldman Sachs reaffirmed their bullish outlook on the gold market, despite the recent volatility and pullback, which is a healthy part of the market cycle, and long overdue after gold’s gangbuster returns in the first six months of 2024.

• Goldman aren’t alone in their view, with Morgan Stanley calling for a gold price of USD $2,600oz by Q4 of this year.

• The recent pullback in gold has also not deterred analysts at City Index who were quick to point out that bulls still remain in control of the precious metal market at present, which may makes the current dip a buying opportunity for investors.

• The World Gold Council published their latest updated on the ETF market, which is finally (after years of outflows) beginning to see money return on the buying side.

• The World Gold Council publish a research piece on the upcoming US Presidential Election, and its potential impact on gold. While it obviously does have the capacity to impact markets, historical observation suggests it is not always a game changer for the gold market, which has other more important drivers.

• BMO Global Asset Management also spoke about gold recently. While they noted its not ‘behaving normally’ (in that it has risen despite some typical tailwinds being absent), they still see it as an attractive holding, noting that; “In the past six months, gold has outperformed the S&P 500. What makes that statement all the more notable, is that its done so in a bull market. The S&P 500 has risen over 18 per cent in the past six months, but gold prices have risen over 20 per cent. It is a trend that goes back roughly to October of 2023, when both gold and the S&P 500 began a pair of bull runs.”

Finally, we revisited the 2024 Central Bank Gold Reserves Study from the World Gold Council, which was released in June. Some key findings that really have the potential to shape this market going forward include:

• 13% of central banks now thinking that the USD will have a significantly lower proportion of total reserves five years from now. That is more than triple what central banks thought back in 2022.

• 66% of central banks think gold will make up a moderately higher share of reserves five years from now. In 2022, only 46% of central banks gave the same answer.

• 100% of central banks thing total gold holdings amongst central banks as a whole are either going to rise (81%) or remain static (19%). No one sees central banks return to the net selling days of the mid 1980s through to mid-2000s, a large part of which coincided with a bear market in precious metals.

All up the report should be a source of great confidence for precious metal investors, with the likely support of official sector buying set to remain a feature of the gold market for years to come.

Chart of the week
Precious metals bring many benefits to a diversified portfolio, including strong long-term returns, inflation protection, exceptional liquidity and a complete lack of credit risk when bought in physical form like the types of products we offer at ABC Bullion.

One of the key drivers of precious metal investment is the diversification benefits they bring to a portfolio, with countless studies from both the investment and precious metal industry showing that gold in particular is not only lowly correlated to other assets, but negatively correlated with risk assets in the periods risk assets fall.

This ABC Bullion gold infographic attests to this point, with gold in Australian dollars for example averaging returns of 15% in the years the Australian equity market declines. In those years the equity market falls, its average return is -12.7%, meaning anyone with a gold allocation has benefited from a +27% return differential between the two assets.

Gold’s diversification benefits, and just how important they may be in the years ahead really came to the fore when reading “You’re soaking in it”, a mid-July update from John Hussman of Hussman funds, a long-time and well respected market commentator whose speciality is looking at US equity markets.

In his note, Hussman noted that:

• Market capitalisation of US equities relative to gross value added by these companies (a decent proxy for how the market is valued at any time) is now higher than it was in the extreme scenarios seen in 1929, 2000, 2007 and 2022 – all of which ended in major crashes.

• despite the rise and dominance of the internet, smartphones, advanced semiconductors, social media, and process efficiencies driven by technology, real U.S. GDP growth and real U.S. corporate revenues have grown slower, not faster, over the past 20 years than during the past 30, 45, 60, and 75 years.

Most importantly, Hussman noted that; “As of July 16, 2024, the S&P 500 would have to fall by just over 70% to reach what have historically been run-of-the-mill valuation norms.”

The below chart illustrates what this may look like:

Note that none of this is useful in predicting what will happen to the market in the next week or next month.

It is however extremely helpful in visualising just how difficult the road is ahead for equity markets, how large the correction in equity markets may be in the coming decade, and therefore just how valuable gold and other precious metals can be if hoping to not only protect, but profit from such a market rebalancing.

Inside the Office
The volatility that we have seen in precious metal prices in recent weeks has brought out the traders, with clients at ABC Bullion active on both the purchase and sale side of the market.

For those clients using the recent price dip to add to their holdings, silver is leading the way, with 10oz ABC Bullion silver cast bars and our signature 1kg ABC Bullion silver cast bar featuring prominently.

Gold is also seeing good buying activity, with ABC Bullion minted tablets growing in popularity amongst smaller investors, while pool allocated bullion also remains a favoured choice, especially amongst SMSF and HNW investors.

In store, we also continue to see solid demand for 1oz silver coins, led by the ABC Bullion Eureka minted silver coin, while on the buyback side, we also continue to see clients using near record gold prices to lock in profits and free up cashflow.

Jordan Eliseo
General Manager
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.