Record demand: Where to next for gold?
03 May 2024
In this week's market update:
Gold prices continued to ease this week, with the precious metal falling by a further 1% to USD $2,303 per troy ounce (oz).
Silver was also on the backfoot, falling by 3% to USD $26.70oz, with the gold to silver ratio rising to 86 over the past five trading days.
Equity and FX markets were relatively stable, with the S&P 500 unchanged, while in Australia, the ASX 200 was -1%.
Commodities, including oil, suffered major falls over the week, with the price of crude down by 6% in the week.
Bitcoin also fell sharply again, with a 9% in the past five trading days, and a 13% correction over the past month seeing the world’s largest cryptocurrency again fall back below $60,000 per coin.
Bond markets rallied, with yields on 10-year US and Australian government debt easing by 0.12% and 0.07% respectively, while at the longer end of the market, the price of 20-year + US Treasuries was up 1%.
What next for gold and silver
Gold and silver prices remained on the backfoot this week, with the price of the two precious metals falling by 1% (gold) and 3% (silver) in USD terms. Prices fell by a similar amount in Australian dollars.
The pullback in precious metals so far looks like a textbook correction, wiping out excess froth in the market.
And while this corrective period may last a little longer, with some more price pressure (the 50-day moving average for gold is currently sitting just above USD $2,220oz) the underlying momentum still very much favours precious metal bulls.
In other precious metal news this week, we have seen:
The tug of war between interest rates, inflation, and how the US Federal Reserve (the Fed) will continue to impact gold, with gold dipping as the market digested the latest signals from the Fed as it relates to the outlook for monetary policy.
There is reason for optimism regarding the outlook for silver, with more attention being focused on recent research from the Silver Institute, which showed an 11% increase in industrial demand in 2023.
Precious metal analyst Ross Norman warned that this consolidation in precious metals may have further to run, noting that in his view, “for gold to sustain a run of this sort, buyers need total belief” and that at present “around the globe we certainly do not have consensus”, with “mints around the world reporting declines of between 80% and 95% year on year”. While we are obviously sympathetic to that view (as we suggested above) there is a bullish interpretation to recent price action, in that gold has rallied strongly despite the lack of support from certain segments of the market. It is winning the fight with one arm tied behind its back as it were. Imagine when global retail demand, and ETF buying return en-masse, as they almost certainly will at some stage.
Supporting the bullish case for gold is UBS, who have stated that a ‘dip in gold prices is a buying opportunity’. Strategists at UBS have maintained a gold price of forecast of USD $2,500oz by the end of 2024, which would represent a near 10% rally from current price levels.
Pod of Gold
My colleague, Nicholas Frappell, Global Head of Institutional Markets at ABC Refinery, also discussed the potential for gold to hit USD $2,500oz in the most recent ‘Pod of Gold’.
The full range of topics discussed are listed below:
Macro forces driving gold down.
Impacts of the SHFE gold contracts
Markets jump at shadows over potential Fed moves.
Positive outlook for the DXY
Fast money versus slow money
One downside target…but large amount of open interest at US$2,500
Nick noted that his key takeaway was that the market is embracing ‘higher for longer.’
It is a must listen as always for anyone interested in precious metals.
Chart of the Week
There are two charts worth sharing this week, both of which came from the World Gold Council (WGC). The first was shared by John Reade, Market Strategist at the WGC, and is relevant to short-term price action in gold, with Reade noting that “Following the ~$100/oz correction from the recent high and a period of consolidation, #gold is now looking a lot less overbought based on the 14-day RSI.”
The second chart speaks to the long-term big picture outlook for gold, and why it remains so positive, with @KrishanGopaul noting “Central banks double down on net #gold demand by setting new first quarter record of 290t in Q1. Reported purchases remained broad-based, with Turkey, China and India leading the way. This strong start reinforces our view that central bank demand will remain robust in 2024.”
Record buying by long-term holders with deep pockets. That is what the above chart highlights.
Bull markets have been built on less.
Inside the office
The volatility in gold and silver prices continues to support elevated trading activity, with healthy turnover, driven by both purchases and sales of precious metals, seen at ABC Bullion this week.
The rationale for those selling remains a combination of profit taking at near record prices, a desire to redeploy capital into other investments, or a desire to pay down debt, with very few sellers expressing an outright bearish view on gold and silver.
On the buy-side, inflation protection and portfolio diversification remain the primary motivators, as does the desire to hold a highly liquid form of portable wealth. Silver buyers are also motivated by the profit potential, with silver notorious for strongly outperforming gold in precious metal bull markets, a fact highlighted in this ABC Bullion article, and chart below.
Chart: Performance in Precious Metal Bull Markets
Source: LBMA, ABC Bullion
Product wise, the demand for silver is being led by our signature ABC Bullion 1 kilo silver cast bar, as well as pool allocated silver, which is a preferred investment vehicle for SMSFs and Family Trusts.
We are also seeing strong demand for the ABC Bullion range of silver coins, including our signature 1oz ABC Bullion Eureka minted coin.
Jordan Eliseo
General Manager
ABC Bullion Australia
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