The battle for $2,000 gold

In this week's market update:

• Gold prices rose by 1% this week, with the precious metal pushing back above USD $1,900 per troy ounce (oz), having found strong buying support at the 200-day moving average.

• Silver was even stronger, up 6% for the week and now back above USD $24oz, with the gold to silver ratio falling to 80.

• Equity markets were uneventful, with the S&P 500 flat, while the ASX 200 is +1% for the week so far.

• Commodity markets rose marginally, +1%, though oil has pulled back from recent gains, falling back below $80 USD per barrel.

• Bitcoin continued its recent run of losses, down a further 6% toward USD $26,000.

• Bond yields pulled back this week, though remain comfortably above 4% for 10-year treasuries, with signs they may have reached a peak in this cycle.

Gold bounces off key support

Gold has enjoyed a solid week performance wise, with the precious metal rallying by 1% to USD $1,916oz. Silver has also rallied, increasing by 6% in USD terms and is once again trading above USD $24oz, with the gold to silver ratio falling to 80 in the process.

Given that strong outperformance for silver is a hallmark of precious metal bull cycles, the sharp move higher that we’ve seen in silver this week is a positive sign, and one that suggests either:

• we have already hit the turning point in the precious metals market, with prices to rise from here

• we are very close to said turning point, with the potential for one last minor move lower before the market bases, and then surges higher.

That view certainly seems to be shared by a range of analysts in the market today, including David Brady, who recently noted that; “as long as 1900 support remains intact, gold price could turn up very soon and test the record high of 2089.

However, a 9% drop to 1900 following a near 30% gain does not seem sufficient to me. If we do break 1900, then a bigger ABC correction is likely underway to 1850 or, worst case, 1750.

Although gold is already bearish and is becoming extreme oversold, my preference is for a breakdown. Almost everyone would become extreme bearish, which would trigger the final flush in gold and provide the fuel to take out any and all resistance on the upside to a far higher record level. Anything below 1900 would be sufficient. 1850 would be ideal.”

Brady also discussed fund positioning in the market today, noting that “funds are slashing their long positions as fast as possible, and the Commercials are doing the same on the short side. This is setting up for the rally we’ve all been waiting for.”

We agree with those sentiments and would note that the potential correction Brady alluded to would likely be minimised in Australian dollar terms given the likely weakness in the local currency that would occur.

Same price, different picture

While the price is the same, the market environment in which gold is trading couldn’t be more different when looking at gold today vs 2011 for example, when it first traded at USD $1,900oz.

The differences include but are not limited to:

• Performance trends: In the ten years to 2011, gold had rallied by more than 450%. Silver had rallied by more than 1000%. In the 10 years to 2023 gold is only up 40% in USD terms, while silver is flat.

• Relative performance: In the ten years to 2011, the S&P 500 had barely budged, with the huge crash that took place during the Global Financial Crisis wiping out years of gains. In the last 10 years, its up by almost 200% (the return from the GFC low is even higher), while valuations have increased from circa 20 to 31 over this period.

• Real yields: In the 2 years leading into the 2011 price peak, real yields on ten-year treasuries in the United States fell by close to 1.50%. In the last two years, they’ve increased by almost 3%, substantially increasing the opportunity cost of investing in gold.

• The US Dollar: Gold is often seen as the anti-dollar, and there is no doubt bear markets in the dollar are typically good for gold and vice versa. In the ten years to 2011, the USD lost roughly one third of its purchasing power. In the last decade, its increased by 25%.

• ETF holdings: In the 2 years to August 2011, more than 600 tonnes of gold flowed into gold ETFs (the number was closer to 1,500 tonnes in the 2 years to August 2020, when gold peaked amongst the COVID-fuelled hysteria that gripped markets for a time). In the 2 years to August 2023, more than 200 tonnes of gold have flowed out of these products.

• Speculative positioning: At its peak in 2011, speculative investors were net long over 210,000 contracts of gold, a position that had a face value of circa USD $40 billion. Today, that position is closer to 30,000 contracts, or just USD $7 billion.

Sum all the above up and we can see that despite a slew of headwinds, the gold price is trading very strongly, within a few percentage points of its all-time high in USD.

In due course, it’s almost certain that all the above challenges gold is facing (higher real yields, strong USD, resilient stock market, investor apathy etc) will dissipate.

Indeed, in the fullness of time they will become tailwinds again (lower real yields, a lower dollar, a weakening stock market and investor exuberance).

When that happens, the USD $2,000oz price point that some market participants see as a gold price ceiling may well instead be revealed as a floor.

Thank you

On Tuesday night, ABC Bullion hosted more than 700 clients and guests at the ABC Bullion Precious Metal Forum; Gold and the Roaring 20s, held at the Ivy Ballroom in Sydney.

The night included keynote presentations and a panel session featuring five recognised industry experts, as well as a short video highlighting the production of the 2023 Lexus Melbourne Cup, with the gold in this years Cup sourced from Newcrest’s Cadia Mine in New South Wales.

On behalf of the entire ABC Bullion and Pallion team, I’d like to thank everyone who attended, and helped make it such a special occasion.

Inside the office

Precious metal demand has picked up notably in the past week, with sales increasing across our online channels, in phone-based trading, and across our state offices, including our Global Flagship Store at 38 Martin Place.
 
A big part of that increase in demand has come through from SMSF trustees, many of whom are allocating to gold for the first time through the use of our pool allocated metals, while wholesale volumes have also increased.
 
In-store, our most popular products remain the 1oz ABC Bullion gold cast bar, the ½ oz ABC Bullion gold cast bar and the 50-gram ABC Bullion gold cast bar, as well as our range of ABC Bullion minted tablets, while 10oz ABC Bullion silver bars and silver coins are also highly sought.
 
We also continue to see elevated levels of buyback activity, with a gold price that’s again approaching AUD $3,000oz encouraging some clients to take profit on part of their precious metal portfolios.
 
With the case for holding precious metals strengthening by the day, we expect we’ll continue to see healthy two-way trade, with more investors turning to precious metals as both a store of wealth, and source of liquidity in the period ahead.

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.