Silver shining as gold rallies

In this week's market update:

• Gold and silver continued to rally this week, prices for both precious metals +1%, with gold last trading at USD 1,939 per troy ounce (oz), while silver last traded at USD $24.20oz

• Currency markets were stable, with the Australian dollar and the US Dollar index essentially unchanged

• Equity markets rallied strongly, with the S&P 500 +3% and back above 4,500 points, while in Australia, the ASX 200 is +2% for the week

• Oil had a huge week, +6%, crude now trading above USD $83 per barrel, with commodity prices across the board +1%

• Bond yields have continued to ease after their recent spike, with 10-year yields in Australia and the United States now approaching or at 4%, while breakeven rates have also declined

Gold and the good oil

Gold prices have continued to rally in the past five trading days, with the precious metal at one point pushing up toward USD $1,950 per troy ounce (oz).

The move, which has seen gold reclaim all the losses it had seen earlier in the month when it temporarily fell below USD $1,900oz, has been more than matched by silver, which is +1% this week, and +4% for the month, with the gold to silver ratio declining to 79.

The rally is particularly impressive given it is occurring against a backdrop of:

• A largely stable equity market

• A stable USD

• Minimal flow from the ETF market

• A near tripling in short positioning in the gold futures market since July.

That short positioning has been led by CTAs, who are currently short to the tune of USD $30bn, the largest short position in more than 4 years according to @Barchart, who touched on this topic earlier in the week.

Looking ahead, one can’t help but be encouraged by the fact gold has (so far) easily held onto its 200-day moving average, which is currently near USD $1,900oz, and indeed is now back above the 50-day moving average, which is closer to USD $1,930oz.

Meanwhile, the strong outperformance of silver in the past month (+4% vs a flat overall commodity market) is also a positive sign.

At a macro level, we can’t help but think going forward, gold will also be supported by inflation data, which we think will surprise to the upside relative to market expectations.

There are several factors driving that view, one of which is the breakout in world oil demand (see chart below which was shared by TopDown Charts), which has hit new heights.

This can be expected to provide upward momentum to inflation going forward, especially given the lack of capital investment in traditional energy investments over the past decade.

While the oil demand picture is promising, it should be noted the potential for US recession could negatively impact energy demand, especially if it has significant ripple effects across the global economy, which US recessions often do.

To that end, the following chart (shared by @CharlieBilello), showing the US Leading Economic Index (LEI) is cause for concern. As Billelo noted; “the LEI has now declined for 16 consecutive months, the longest down streak since 2007-08. The Conference Board is now forecasting a US recession to begin in Q4, pushed back from its previous forecast of Q3.

While a potential US recession would be a negative for energy demand and may minimise any inflation-led spike in gold demand and prices, we’d still expect the precious metal to benefit on a net basis.

This is because a recession would likely see safe haven demand for gold rise, especially if it occurs alongside a substantial pullback in equity markets.

Silver to lead gold higher

Many clients at ABC Bullion watch the gold to silver ratio closely, as it gives them an indication of which of the two metals may outperform in any given period.

The difference between the gold to silver ratio in 2011 (when it was closer to 30) vs 2023 (where it is closer to 80) is one of the key reasons we remain so optimistic on the outlook for precious metals in the years ahead, with the current ratio suggesting that silver will outperform meaningfully, and that precious metal assets across the board will increase.

Charlie Morris of ByteTree Asset Management recently published a great update on silver, looking at its potential outperformance going forward, and some of the factors impacting the market.

His update included the following chart, which plots the expected deficit in silver (as in demand outstripping supply) with a large part of this coming from rising industrial demand.

If demand for silver investment returns to its levels of the past, then this deficit will only worsen, which should be very bullish for silver prices.

We particularly agree with his assessment of the difference in silver sentiment today, compared to previous periods where the silver price has soared.

As Morris observed; “…there is no meme craze, and the ETFs are experiencing outflows. That makes the current price action in silver quite impressive. The price remains firm while there is external selling pressure from investors.”

Like gold, silver is performing well despite a raft of challenges that would normally be expected to negatively impact precious metals.

When those market dynamics shift, and they inevitably will, both gold and silver will benefit, with the potential for prices to ratchet higher in the process.

Australian Gold Conference

ABC Bullion was a proud sponsor of the Australian Gold Conference at Crown Casino in Barangaroo this week.

I was given the honour of participating in a panel session, as well as presenting on the battle for USD $2,000 gold.

The following slide summarises the differences in the market today, vs 2011 when gold first traded near these levels.

Suffice to say the outlook is considerably more favourable now.

It was a great event, and we enjoyed networking with many of our clients who also attended. A huge congratulations too to our Managing Director, Janie Simpson, who was the winner of the Maggie Bullion award for her services to the bullion industry over the many years she has been involved.

Inside the office this week
 
Turnover across all ABC Bullion channels has been robust again this week, with significant two-way trade in both gold and silver.

Gold returning to the AUD $3,000oz price level is obviously helping encourage this trade, with some investors adding to their holdings, while others are using the near record high price to raise cash, with the liquidity of gold and silver being one of their key attributes.

High net worth investors, including many SMSF trustees, have taken a particular interest in silver, with ABC Bullion 1 kilo silver cast bars the most popular product, while silver coins and gold minted tablets remain popular with retail investors.

We also continue to see large numbers of new clients activate ABC Bullion Gold Saver Accounts, with investors using the ABC Bullion Gold Saver rewarded by the more than 50% increase that we’ve seen in the AUD gold price since it was launched back in 2016.

Jordan Eliseo
General Manager
ABC Bullion Australia

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