Precious metals stabilise as recession risks build!

In this week's market update:

• Precious metal prices bounced over the past five trading days week, with gold on track to break its recent losing streak, up 1% to USD $1,977 per troy ounce (oz).

• Silver has also rallied, up 4% in USD terms, with the precious metal last trading at USD $23.9oz, a move that has seen the gold to silver ratio (GSR) decline to 83.

• Local currency investors saw similar moves in metal prices in Australian dollars, with the AUDUSD FX rate last sitting at USD $0.65.

• In other markets, oil has continued to weaken, last trading just above USD $70 per barrel, while US equities continue to rally (+2%), with tech stocks continuing to lead the market higher.

• Crypto markets also saw a minor bounce after a month of falls, with Bitcoin up by 2% and pushing toward $27,000.

• Treasury yields and inflation expectations saw major falls, with US 10-years last trading at 3.60%, down 0.23% over the week, with similar moves seen in Australia.

Who drives the gold market?

Gold has bounced this week, with a 1% rise halting a losing streak that at one point had seen the precious metal give up more than USD $100oz between early April and late May 2023.
Silver has also been on the rise, last trading at USD $23.90oz, up 4% for the week in USD terms, with the gold to silver ratio (GSR) currently sitting at 83.

The bounce in gold has occurred against a backdrop of share market strength, at an overall index level at least (breadth continues to deteriorate, which is a warning sign for equity bulls) and a removal of tail risk given positive developments on a resolution to the US debt ceiling impasse in Washington.

While this week’s bounce in precious metal prices will have encouraged bulls, it is too early to say this correction is definitively over. Net positioning in the gold futures market at risk of unwinding further, while a range of technical indicators suggest gold could struggle short-term, in USD terms at least.

This downside, should it eventuate, would likely be modest (and a good chance to add to positions) with strong support expected in the mid to low USD $1900oz range.

Given this backdrop, it’s no surprise to see mixed commentary regarding gold in the market right now, with Standard Chartered noting gold could again test all-time highs shortly, though they see headwinds on the horizon, while PIMCO believe gold may be challenged short-term, but that its appeal as a long-term investment remains intact.

Moving on from the daily gyrations, and there is no doubt that one of the key developments in the gold market in the last two years has been the rapid rate of accumulation by central banks.

These entities, which as a collective turned net buyers at around the time the Global Financial Crisis hit, bought more than 1,000 tonnes in gold in 2022.

While there is no doubt this segment of the market has provided solid support for gold bullion, and likely will continue to do so for the foreseeable future, it doesn’t necessarily correlate that well to gold prices.

Retail demand, for bars and coins like those we sell at ABC Bullion, as well as for gold ETFs tends to correlate far more closely with gold prices, as the following chart from a recent Longview Economics update highlights.

Longview also noted that the correlation between real yield and gold prices increases significantly during recessions. This will be another factor for investors to watch going forward, with recession risk rising, and this week’s gold bounce coinciding with a 0.13% fall in real yields on 10-year US treasuries.

A sticky situation

Headline inflation rates, especially in the United States, have come down notably in the last year, with the annual pace of consumer price increases dropping from more than 9% in mid-2022 to just under 5% in April 2023.

While this decline has been pleasing to see, it would appear to far too early to suggest that the inflation genie is well and truly back in the bottle, with other measures of inflation proving far more stubborn.

This includes median and mean CPI figures, both measured by the Cleveland Federal Reserve, which suggest inflation is running at 6.1% to 7% per annum based on latest data, while a recent note from Coolabah Capital that was published on Livewire Markets noted that core inflation in the United States is still running at closer to 4%, which is double the target set by the US Federal Reserve.

While 4% inflation is certainly an improvement on the inflation rates we were seeing last year, it is a huge increase compared to what we saw for most of the last decade.
It is also a level that is sufficiently high that it will prove an ongoing challenge for both policymakers, and investors trying to grow and protect capital.

Elevated levels of inflation are unlikely to be the only tailwind for gold going forward, given the rising risk in equity markets, which we discuss below.

Warning sign for stocks

Alongside inflation protection, high liquidity, and solid long-term returns, one of gold’s best attributes is that it tends to hold up very well in periods of market stress, when risk assets like shares are falling.

This can be seen in the below chart, sourced from ABC Bullion’s 2023 Precious Metal Investor Guide, which shows the average return for gold, and for stocks in the months, quarters and years that stocks decline in value.

This feature of gold has come to the fore many times in the last twenty years, with the equity market crash of the early 2000’s coinciding with beginning of the secular bull market in precious metals, while the GFC, COVID and 2022 equity market corrections also fuelled gold demand.

There are multiple warning signs that suggest we may be in for another correction in risk assets soon, including a stagnation of flows into equity markets, which is evident in the below Bank of America chart, sourced here.

The chart makes it clear that there have been other times in the past fifteen years where equity flows have stagnated.

Most of those have coincided with corrections, and sometimes outright market crashes.

The chart also highlights that post the COVID crash of early 2020, there was a wave of money that chased risk assets higher, with circa USD $1.2 trillion flowing into the market in barely a year.

This flow data, combined with a range of other warning signs including deteriorating breadth in the market, an inverted yield curve and persistently high inflation all suggest another serious pullback for risk assets could happen shortly.

Expect gold to be a primary beneficiary if that does indeed play out.

Pod of Gold

My colleague Nicholas Frappell, Global Head of Institutional Markets at ABC Refinery, recently recorded the latest edition ‘The Pod of Gold’. It is a timely discussion given the recent correction in precious metal prices, with gold falling by over USD $100oz in the last few weeks, with debt ceiling negotiations in Washington a key topic.
Nick also looks at what has driven the recent pullback in the Australian dollar, which has now fallen below USD $0.65, with that fall in the local currency helping to keep the AUD gold price near $3,000oz.

The below timeline covers the key topics addressed in the podcast, and at what point of the conversation they are discussed.

• 00:00 - Intro

• 00:40 - What's driving gold's downward trend?

• 02:25 - The bullish case for gold

• 04:26 - The debt ceiling issue

• 05:33 - Managed money positioning

• 08:31 - The Aussie dollar falling.

• 12:51 - Targets for the Aussie dollar

For gold investors, it is well worth the 15 minutes.

Inside the office this week

Demand for precious metals remains robust, with strong turnover seen across all ABC Bullion trade channels. This includes 24/7 online trading, phone based trading, and in-store purchases and sales across our locations Australia wide, including our Global Flagship at 38 Martin Place.

50-gram ABC Bullion gold cast bars remain one of our most popular products, though we are also continuing to see strong demand for ½ ounce ABC Bullion gold cast bars, while on the silver side, the 10oz ABC Bullion silver cast bar is often our best seller.

We’ve also seen a notable uptick in ABC Bullion Gold Saver activations, in part driven by recent media coverage of the product.

The ABC Bullion 1/2oz Gold Cast Bar.

Warm Regards,

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.