Precious metals power on!

In this week's market update:

• Gold prices rallied again this week, with the precious metal +1% to USD $2,378 per troy ounce (oz), despite a sharp sell-off on Monday that washed out some of the froth building in the precious metal space.

• Silver was also stronger, last trading at USD $28.20oz, with the gold to silver ratio stabilising at 84.

• Prices were even stronger in Australian dollars terms, with gold trading above AUD $3,700oz at one point, with the local currency falling to USD 0.645.

• The strength in precious metal markets stands in stark contrast to other markets, with risk assets like shares and cryptocurrencies both selling off sharply. This is seen through a 4% fall in the S&P 500, and a 10% decline in Bitcoin, which is now trading back below levels seen in late 2021.

Silver looking spectacular as gold remains bid
It has been another positive week in the precious metal market, with gold and silver prices both rising by 1% in USD terms, despite a sharp correction in Monday trade which saw some of the froth that had built in the market in past weeks washed out.

The continued strength in precious metal markets should be no surprise given the escalating tensions in the Middle East (including the Iranian attack on Israel) and a sell off in risk assets, with equities and cryptocurrencies both falling sharply this week.

A continued rise in bond yields, and mention of the potential for further interest rate hikes by the US Federal Reserve have also failed to dent the appetite for bullion, with silver also well supported.

Speaking of silver, and this week saw the release of the 2024 World Silver Survey, which announced that for the third consecutive year, silver demand had exceeded supply, resulting in a structural market deficit of 184.3 Moz.
 
The strong demand for silver is primarily being led by industry, of which photovoltaics is playing a huge role, with total demand from this sector of the market rising from 510 million ounces in 2020 to 654 million in 2023, with forecast demand in excess of 710 million ounces in 2024.
 
These data points bode well for higher precious metal prices in due course, with broader sentiment data, including a recent Bank of America survey that says gold “is the most overvalued it’s been since August 2020”, also positive, as these are not the kind of readings one typically sees at the end of a bull market run.
 
Chart of the week
For this week’s chart, we turn to Ross Norman, one of my favourite gold analysts, who has been doing some sleuthing work trying to find out what is behind the circa 20% surge in bullion prices in the last couple of months.

The answer, at least in part, appears to be even higher demand coming out of China than originally expected, with the below chart highlighting turnover (in USD billions of dollars per day) in London (the blue line titled LBMA), futures markets (orange line – CME), as well as on the Shanghai Futures Exchange (SFE).

As you can see, the volume on the SHFE has exploded since the start of the year, rising from below USD $10bn to almost USD $40bn in daily trade volumes.

As Norman stated in the article that contained this chart, the spike in volume on the SHFE: “might explain why gold had not responded to news for example that the Fed would hold rates higher-for-longer as well as other bearish indicators. The buyers were likely looking at Chinese domestic issues.

So, two questions – what does this mean about the centre of gravity for global trading … and what does the SHFE futures buying mean for the outlook for the gold price?
Too early to say whether the price discovery process is shifting to the East. Two exceptional trading months are insufficient to make any claim. But liquidity begets more liquidity, and the momentum is certainly with China. Exchanges generate their own gravitational pull – it is all a bit binary – and London has held the role for centuries as the leading hub, in much the same way that the London Metal Exchange (LME) has done for base metals.

Arguably the Chinese gold price is not adequately representative as a fair global benchmark because it is landlocked – gold cannot be readily exported and hence it could be argued that it only represents the domestic position. But as the world's largest producer and consumer, one would imagine that China has ambitions to be THE price-setter.

On the price direction … well in order to understand the gold market one would need to take a greater account of how things are seen through Chinese eyes – certainly just now.

As regards the price outlook itself … well that depends upon who is placing very large leveraged futures positions on SHFE (speculative or hedging?); SHFE is not cash settled like CME and is for physical delivery which could create an interesting squeeze.
 
Inside the office
The boom in precious metal prices that we have seen since last February has reignited a form of gold fever in the marketplace, with trading activity spiking.

Unlike previous periods in which the gold price has surged, what makes “this time different” is that the heightened trading activity is very much a two-way phenomenon. Not only are sales of precious metals to clients very healthy, but buybacks of metals from clients are running at more than two times their regular levels.

We attribute this to a range of factors including:

• Good old profit taking: Gold at or near AUD $3,700oz is a record price, and one that is up by approximately 20% in just a matter of months. There are lots of investors sitting on significant gains with their precious metal holdings. It makes sense that some are going to realise those profits at current price levels.

• Higher interest rates:  Given most mortgage rates start with a 6 or a 7 in front of them now, it stands to reason that some investors will sell down their precious metals (and other assets) just to minimise interest expense on debts.

• Speculation in other asset classes: While gold is surging, it is not the only asset performing well at this stage. Cryptocurrencies have rallied strongly (until the last week or so anyway), while equities have also been resilient for most of the year. This is driving some people to sell gold and/or silver, not because they no longer believe in holding precious metals, but because they see an opportunity to make greater short-term profit in other assets, before returning to gold and silver.

Product wise, this heighted two-way trade is most seen through turnover in pool allocated gold and pool allocated silver, as well as ABC cast gold bars.
We are also seeing very strong demand for our range of silver coins, and ABC Bullion gold minted tablets, particularly by investors who prefer to own their gold in small denomination products.

Jordan Eliseo
General Manager
ABC Bullion Australia

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