Silver on sale as gold steadies

In this week's market update:

• Gold spiked toward USD $1,850 per troy ounce (oz) early this week, though was unable to hold onto the gain, with the precious metal last trading at USD $1,830oz, essentially unchanged over the past five trading days.

• Silver has continued its recent decline, falling toward USD $20oz, down 3%, with the gold silver ratio back above 90. This represents significant underperformance for silver in Q1, with the ratio beginning 2023 closer to 75.

• Australian investors have seen prices supported by a decline in the Australian dollar, which fell 2% to USD $0.66 over the past week, while equity markets continue to trade in a relatively tight band.

• Commodity prices were weak across the board, with oil down 3%, again trading near USD $75 per barrel, while Bitcoin is down 11%, last trading below USD $21,000.

• 10-year bond yields fell, despite markets pricing in higher short-term rates, with the spread between 2 and 10-year treasuries hitting levels last seen 40 years ago.

Markets price in higher interest rates

Precious metals were mixed again over the past five trading days, with gold essentially ending the week to Thursday, March 9th unchanged near USD $1830oz, with the market eagerly anticipating the next set of US jobs data.

Silver on the other hand remains mired in a downward spiral, at one point trading below USD $20oz, though it’s since reclaimed that level, with the metal off by another 3% for the week, with the rolling 12-month performance now sitting at -23% in USD terms.

Expectations around the path of monetary tightening remains a key factor driving asset prices, including precious metals, with markets now increasingly open to the chance that the US Federal Reserve will implement a 0.50% rate hike at their March meeting.

This change in sentiment was captured in a recent from CitiGroup, who, according to Jonathon Ferro, noted that they “now expect a 50bp rate hike at the March FOMC meeting (rather than 25bp) with a terminal rate of 5.5-5.75% (up from 5.25-5.50%). The 255k jobs and 0.5%MoM core CPI we project in our final forecast are likely enough to provoke the 50bp hike.”

Up until a few days ago, markets were convinced the Fed would hike by 0.25% at most, but this has changed given incoming data, and statements by Fed Chair Jerome Powell, who so far appears to be resisting pressure, from both Wall Street and Washington, to begin removing his foot from the monetary brake pedal.

As an example of that pressure, Senator Elizabeth Warren recently grilled Fed Chair Powell about the monetary tightening that is taking place, asking him; “What do you say to the 2 million people who you plan to put out of work with your rate hikes?”

It’s a fair question, as there is no doubt monetary tightening will restrict economic activity and therefore employment prospects, especially given job losses, once they start, tend to snowball.

As evidence of this snowball effect, historysuggests that since World War II, on 11 of the 12 occasions the US unemployment rate rose by more than 1% in a year, it went on to rise by at least another 1% before peaking.

The flip side of the unemployment coin, and Senator Warren’s question is that the Fed also owes an explanation to 300 plus million Americans about what is going to do to bring down multi-decade highs in inflation which are eating away at the wealth and purchasing power of everyone.

In short, central banks have no good choices to pick from, with this conundrum also being faced in Australia, where the Reserve Bank passed on another 0.25% rate hike this week, though struck a surprisingly dovish tone, which has raised market hopes we will soon be at the end of this domestic rate hiking cycle.

Back to gold, and while some more short-term weakness can’t be ruled out, with support in the USD $1775-USD $1800oz range, we can’t help but be somewhat encouraged by recent price action.

It is telling that gold has steaded in the past month, despite the surge in rates, the increase in real yields, the still incredibly benign inflation expectations of the market, and the lack of buying interest from ETF investors.

The below chart also offers encouragement, if not outright bullishness, demonstrating that while gold remains in a consolidation phase, it is definitely not overbought, while it continues to outperform equities.

On balance, this is encouraging, especially for long-term accumulators.

Silver on sale as gold silver ratio hits 90

While gold prices have steadied over the last month, silver has continued to weaken, having fallen by 10% in USD terms since early February.

Commenting on the recent weakness, Nicholas Frappell, ABC Refinery’s Global Head of Institutional Markets noted that “Silver remains defensive on USD strength, which is in turn a reflection of fairly hawkish recent commentary from Fed Chair Powell, and market pricing regarding interest rates ahead of the next FOMC meeting. Additionally, 2023 is expected see lower levels of physical demand from India, due to b__oth lower growth expectations, and a restocking of inventory that is unlikely to be repeated. From a technical perspective, rebounds in silver are likely to find resistance at USD $20.60__oz and USD $21.30oz.”

The recent disparity in the performance of the two precious metals has seen the gold to silver ratio (GSR) climb above 90, with gold trading at USD $1830oz and silver near USD $20oz.
That represents an increase in the GSR of 15 since the start of the year, with the below chart, taken from a recent ABC Bullion infographic, highlighting that the GSR ended last year at 76.

Given the history of movements in this ratio since the early 1970s, a GSR of 90 or above suggests silver is extremely undervalued relative to gold.

This would suggest that over the next few years, silver offers the potential for significantly higher levels of growth, though of course, it will also likely display higher volatility.

Were this to happen, it would be a case of history repeating (or rhyming at least), with the below chart, sourced from the same infographic,  highlighting how silver often outperforms, and by a long way, in precious metal bull markets.

Central banks keep building gold stockpile

In 2022, central banks bought record amounts of gold, with best estimates suggesting the total central bank gold stockpile grew by more than 1,100 tonnes, driven by both geopolitical uncertainty and high inflation.

While most analysts expect buying levels to ease this year, so far we continue to see robust demand levels with the below chart from the World Gold Council suggesting net buying totalled almost 80 tonnes in January.

The buying was again concentrated amongst a few key central banks, including the Central Bank of Turkey and the People’s Bank of China (whose reserves now top 2,000 tonnes), though it was notable that Singapore also added 45 tonnes to their holdings as well.

The World Gold Council also noted that; “The European Central Bank (ECB) reported a near 2t rise In Its gold reserves In January, however, it was not an outright purchase by the bank. This was related to Croatia joining the currency union, as the country was required to transfer the gold, as part of a larger transfer of reserve assets, to the ECB. For this, the country bought nearly 2t of gold in December.”

The purchases have continued since, with the latest news suggesting that in February (note there is always something of a lag with central bank data), the Central Bank of Turkey bought another 22.5 tonnes of gold, with Krishan Gopaul noting this is the third consecutive month they’ve bought more than 20 tonnes of gold.

The strong level of central bank demand bodes well for the gold market this year.

This sector of the market, combined with bar and coin demand, and an expected increase in jewellery demand out of Asia, should at least provide a solid floor for gold prices in 2023.

It will also help fuel the next bull leg higher, which will likely coincide with more speculative interest on the long side of the gold market, and the return western investor demand for gold ETFs, which often adds upside momentum.

Inside the office this week

We continue to see brisk two-way trade at ABC Bullion.

Buyback activity remains high, with investors either locking in profits on long-held precious metal positions, with gold and silver above AUD $2750oz and AUD $30oz respectively, or looking to free up cash, with the high liquidity of precious metals a particularly attractive factor.

We are also seeing long-running clients continuing to build their precious metal holdings and a steady influx of new clients adding precious metals to their portfolio for the first time.
ABC Bullion 1oz gold cast bars and ABC Bullion 1 kilo gold cast bars are particularly popular for this clientele, as are 1kg ABC Bullion silver cast bars.

The ABC Bullion 1kg 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.