Silver corrects as inflation cools!
12 May 2023
In this week's market update:
Precious metal prices eased this week, with gold falling by 1%, though the yellow metal remains above USD $2,000 per troy ounce (oz) and close to AUD $3,000oz, a near record high.
Silver has seen a much larger fall, off by 6% in the past five trading days, with most of the pullback seen in the last 24 hours, with the precious metal falling by more than US $1.20oz, last trading at USD $24.20.
Commodity prices remain volatile, with oil up 4% week on week, though this only limit the recent correction, with crude still down 13% since early April.
Cryptocurrency markets also remain fragile, with Bitcoin -6% across the week and now down -11% over the past month.
Bonds yields rose modestly over the week, though still look headed lower, with headline inflation in the United States, and inflation expectations continuing to ease.
Gold and Google
Gold remained in consolidation mode this week, with the precious metal continuing to hold above USD $2,000oz, though so far unable to sustainably push higher.
Silver on the other hand came under strong selling pressure, particularly in the last 24 hours, last trading at USD $24.20oz, down 6% for the week.
The moves in precious metals occur against a backdrop of falling headline inflation in the United States, with the year-on-year increase in consumer prices (CPI) to end April now sitting at 4.9%, barely half the levels we saw just under a year ago.
While the decline is unquestionably welcome news, it’s too early to celebrate the death of inflation, with core CPI still tracking along at 0.4% month on month, and 5.5% year on year, which is more than double the levels policymakers would be aiming for.
Median and trimmed mean inflation are also running at 7% and 6.1% respectively at present, demonstrating clearly that inflation beast is yet to be slayed, with trends in inflation data, and the divergence between the various measures of it evident in the chart below from the Cleveland Federal Reserve.
The inflation data presents both opportunity and risk for precious metal investors. On the negative side, lower inflation should in theory dampen demand for gold as an inflation hedge. On the positive side, lower inflation strengthens the odds that central banks will soon begin to cut rates, lowering the opportunity cost of holding, especially in real terms if rates fall faster than inflation does.
The evolution of these trends, and which factor is seen as more dominant from one day to the next is one reason why accurately calling the direction that prices will move in the short-term remains as much luck as it does skill.
There are however other data points we can look at which give us a feel for where gold sits today.
The first of those is investor interest.
On that score, things look positive, with a recent Forbes article noting that about a quarter of American’s now see gold as the best long-term investment, according to a recent Gallup Poll. The Poll also suggested that for the first time since 2012, more investors favour gold, rather than stocks.
While that could be interpreted as a bearish warning sign (if so many people like gold, doesn’t that mean it’s overbought) it should be pointed out that real estate remains by far the most popular investment, with 34% of American’s favouring bricks and mortar. That’s a very different scenario to gold’s original push toward USD $2,000oz in 2011, when it was by far the most popular choice, with real estate and stocks both deeply unpopular just over a decade ago.
Gold is also benefitting from renewed institutional interest, with a recent Bank of America research report titled ‘the new case for gold’ noting that gold is “that rare thing, an uncorrelated anti-stagflation hedge”, with other commentators noting that it’s a “best of breed” asset for portfolio diversification in a higher inflation environment.
There is also likely to be ongoing support from central banks and other buyers looking at the markets through a nation state lens. This was discussed at the recent Sohn Conference, with Karen Karniol-Tambour, co-chief investment officer at Bridgewater Associates noting that weaponization of the U.S. dollar after Russia invaded Ukraine last year has reduced the importance of gold's opportunity costs.
She went on to note that “this geopolitical turmoil is not going away," with this trend providing “a slow-moving secular support for gold”. Little wonder she also noted that “gold is underrated. It’s got a long way to run”.
Back to the more retail end of the market and we’ve also seen a recent Wall Street Journal article suggesting that google searches for ‘how to buy gold’ has hit a record high.
Interestingly, that article noted that one of the growth areas for gold demand is from cryptocurrency investors, with many investors that were formerly advocates of purported digital currencies turning to gold more recently.
This is unsurprising given the extreme volatility and drawdowns witnessed in the price of digital assets since their peak in late 2021, combined with the corporate failures and fraud that has been exposed in the last 18 months.
Indeed, at ABC Bullion, we’ve seen this first-hand, with a notable increase in demand from this segment of the market, which has only added to the robust bar and coin buying we’ve been seeing.
Global gold demand update
Every quarter, the team at the World Gold Council release their widely read Gold Demand Trends report.
Their latest report, which looked at demand trends across Q1 2023 noted mixed results across the gold sphere, with; “continued momentum in central bank buying and resurgent Chinese consumer demand contrasted with a negative contribution from ETFs and weakness in India”.
Their report went on to note that:
Central bank demand surged in the quarter, with 228 tonnes of gold added to global reserves.
More than 300 tonnes of gold were bought in bar and coin form during the quarter, and increase of 5% year on year, though it was not uniform, with some regions seeing a spike, while other areas lagged.
ETFs continued to see negative net demand, which is atypical given the recent price strength.
Stability in global gold jewellery consumption, with demand of just under 478 tonnes.
Investor guide and updated performance
ABC Bullion was proud to release its 2023 Precious Metal Investor Guide last week, with the release coinciding with a new all-time high in the Australian dollar gold price.
The updated guide touches on five of the key reasons to invest in gold, from long-term capital growth to inflation protection, to protection from market volatility when share markets fall.
It also looks at gold’s market leading performance in past periods interest rates were rising, a subject that is highly topical given central banks, including the Reserve Bank of Australia, continue to nudge rates higher, despite looming recession risks.
While gold is in many ways likely to remain the preferred asset for wealth preservation, silver should not be overlooked, especially given current market conditions which suggest it is historically cheap relative to gold.
To that end, the investment guide also looks at silver, and why Australian investors may wish to allocate to the precious metal, noting that silver typically outperforms during precious metal bull markets, and that it has historically been an even better hedge than gold has in high inflation environments.
The guide also discusses some the frequently asked questions that investors have when it comes to buying, selling and storing precious metals, and features some of the products ABC Bullion offers its ever-expanding customer base.
Inside the office this week
ABC Bullion continues to see brisk trade across our four Australian office locations, including our Global Flagship store at 38 Martin Place.
This week we’ve seen a pick-up in demand for ½ oz ABC gold cast bars and a range of silver coins, while gold minted tablets also remain popular. Buyback activity also remains healthy, with some investors happy to take profits with gold still near record highs in AUD terms.
For investors with larger sums, 1 kilo ABC cast silver bars remain a highly popular choice, while online, investors continue to use our pooled products, which are available for gold, silver, platinum and palladium to build their precious metal allocations.
The ABC Bullion 1/2oz Gold Cast Bar.
Warm Regards,
Jordan Eliseo
General Manager
ABC Bullion Australia
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