The case for gold grows stronger!

In this week's market update…

• Gold prices rallied again this week, with the precious metal +1% to USD $1,982.50 per troy ounce (oz).

• Despite climbing above USD $23oz earlier in the week, silver was unable to hold onto the gains, and is currently -1% over the past five trading days, with the gold to silver ratio (GSR) now sitting at 87.

• While foreign exchange markets were stable, it was risk off across broader markets, with equity indices in the United States (S&P 500) -3% and Australia (ASX 200) -2%.

• Commodity prices were also hit, led by oil which is -8% and back below USD $85 per barrel.

• Cryptocurrencies by contrast caught a strong bid, with Bitcoin +19% on the week and back above USD $30,000 per coin.

• Bond yields continued to climb, with 10-year treasuries in both the United States and Australia now approaching the key 5% level, with expectations of further interest rate hikes building.

Gold going from strength to strength.

Gold was stronger again this week, with weakness in equity markets, and the ongoing conflict in the Middle East helping drive the price back above USD $1,975oz.

Gold’s recent price action and the evolving geopolitical and market landscape is reigniting conversations around the role it can play in a portfolio, with a recent update from Aberdeen highlighting the fact gold remains underutilised in investor portfolios, that it can be a core risk management tool. Critically, they also discussed the view that investors would be best looking at precious metals as a distinct asset class, rather than simply part of a commodities basket.

Economists at UBS meanwhile have used the recent events in the Middle East to highlight the importance of diversification, while for gold, they see an additional tailwind on the horizon given expectations the US Federal Reserve will turn to interest rate cuts, lowering the opportunity cost of investing in gold in due course.

Despite the recent price spike and the strong evidence of the benefit of holding gold in a portfolio, it remains somewhat off the radar of investors looking for defensive assets, best evidenced by the gold ETF market, which remains quiet, and speculative positioning in the futures market (more on this below).

By contrast, as highlighted in the below chart from BofA shared by @Barchart, US Treasuries have racked up the better part of 9 months’ worth of consecutive weekly inflows, the longest streak since 2010.

While we can understand the rationale of allocating to bonds given the higher nominal yields on offer, investors in these products would so far be sitting on quite significant capital losses, given any increase in yields effectively means a decrease in price.

Given the inflation risk these investors also remain exposed to, we think many would be better off allocating part of their portfolio to gold and other precious metals instead.

Seven reasons to add gold to your portfolio!

Earlier this week, we published a short article highlighting why investors may wish to add gold to their portfolio today. Reasons include.

• Inflation remains high: While it’s not currently sitting at 8-9% per annum like it was just over a year ago, inflation across the developed world is still at uncomfortable levels. With commodity prices beginning to increase again, inflation may go up, not down, in the coming year. That will likely be bullish for gold.

• Interest rates are set to peak: Interest rates in Australia, the United States and around the world are likely close to peaking, with a good chance that central banks will cut them by early to mid-2024 at the latest. Lower interest rates often act as a catalyst for higher gold prices, as investors take money out of the bank and turn to assets like gold and other precious metals instead.

• ETF investors continue to shun the metals: ETFs are financial products that trade on the share market. Gold ETFs are products that are designed to track the price of gold. Typically, when the gold price is rising, investors in these products are adding to their holdings. This adds upside momentum but also carries risk. This time around ETF investors are cutting their gold holdings. That’s a good sign, as it means there is no froth in this part of the market.

• Speculators have abandoned gold: Typically, when a market is charging higher, speculators go ‘all-in’ betting the price will keep going. Conversely, when a market is falling, speculators bet the price will fall. In past periods gold traded near USD $2,000oz, and speculators were incredibly bullish. They were wrong though, as gold didn’t go far beyond USD $2,000oz. This time around they aren’t bullish at all. That’s a good sign!

• Equity market risk remains high: Investors in the US stock market are still paying more than 30 times earnings to be owners of equities. That is very expensive by historical standards, and at a level that often leads to major stock market falls. Given gold has historically been the best performing single asset to own in periods when equity markets fall sharply, its role as a diversifier may be crucial going forward.

• Recessionary fears continue to build: From an inverted yield curve to a slowdown in housing, a decline in retail sales, or falling consumer confidence, signs of a pending recession are everywhere. Gold tends to thrive in such periods, typically outperforming other assets.

• Market history says gold goes higher: While gold will always be volatile in the short term, the weight of history suggests gold could go much higher in this cycle. In the great bull market run of the 1970s, the price of gold rose more than 20 times over. It hasn’t run anywhere near as fast this time, despite several catalysts that are arguable as if not more powerful today than they were fifty years ago, including elevated US debt levels, expensive equity markets, and geopolitical tensions.

It’s also worth noting that it’s not uncommon for gold to take time to work through important price milestones. The precious metal took the better part of 18 months from the time it first traded at more than USD $1,000oz to decisively break through and hold that level.
 
At the time, most people thought USD $1,000oz was the ceiling. Turns out it was a floor.

Gold: A short story!

When markets are trading at or near all-time highs, it’s not normally that hard to see signs of investor exuberance. Whether it be speculative positioning, fund inflows, google searches for how to buy said asset class, talking heads on financial news channels, or the infamous magazine cover indicator, there are always multiple warning signs of a top, even if most (almost none?) of us pay attention until Harry Hindsight comes along.

When it first traded at the USD $1,900-USD $2,000oz level back in 2011, gold was no different. Ten years of consecutive gains, a +400% return differential vs risk assets in the prior decade, and the onset of ZIRP and QE all led to gold becoming the number one long-term investment choice for American investors, according to a Gallup Poll at the time.

Rather than rocketing to new highs, that period marked an almost 10-year top for the precious metal, with gold falling back below USD $1,100oz by the end of 2015. It then spent the next three years struggling to meaningfully move higher (despite the Brexit and Trump effect), before gold finally got going again in late 2018, putting on seven straight quarterly gains to temporarily top USD $2,000oz just over three years ago in late 2020. Gold was also incredibly popular back in late 2020.

Move the calendar forward to today, and despite the fact gold is again knocking on the door of USD $2,000oz, sentiment could not be more different. There are multiple indicators of this, from Bloomberg story counts, to continued outflows from gold ETF investors in 2023.

But nowhere is the lack of excitement when it comes to gold more evident than in the futures market. Indeed, up until just over a week ago speculative short positioning was so elevated, and long positioning so absent, that this segment of the gold market found itself net short, meaning more money was being bet that the gold price would fall, rather than rise.

Followers of these data sets will be aware that this is a very rare circumstance, as the following chart, which shows gross long and gross short positioning, as well as movements in the USD gold price from 2010 onwards, illustrates. Note that in the chart, MM denotes managed money or speculative positioning.

As you can see, when gold was first trading near USD $1,800oz back, there was almost no one short gold, while long positioning was peaked at more than 220,000 contacts (each contract is for 100 ounces of gold, so 220,000 contracts equate to USD $40bn in money bet that gold would rise).

It was similar in early 2020, when gross long positioning peaked at more than 260,000 contracts (USD $47bn) vs almost non-existent short positioning.

Today, we find ourselves in a situation where the market is more evenly matched, with gross short positioning (120,000 contracts) exceeding gross long positioning (93,000 contracts) by the 10th of October, though this has begun to reverse.

The complete absence of froth from this segment of the gold market should be an encouraging sign for precious metal bulls, especially given previous periods of short positioning exceeded long positioning and turned out to be great buying opportunities.

The most obvious of these, which is also evident on the chart, was Q3 of 2018. As we highlighted earlier in this article, gold was trading below USD $1,200oz back then. It would go on to rally for the next seven quarters in a row, rising by more than 70%.

While there is never any guarantee history will repeat, a similar move in a similar timeframe from current levels would see gold trading north of USD $3,300oz by mid to late 2025.

Inside the office

At ABC Bullion we’ve seen a surge in trading volumes from our Australian client base this week, with many investors taking advantage of the spike in precious metal prices to liquidate part of their bullion holdings, with all investors effectively selling at a profit given the record high Australian dollar gold price. 
 
We are also seeing healthy levels of buying, as investors add to their positions, with many convinced gold and silver are in the early stages of what may shape up to be a multi-year bull market in this asset class.
 
Online, much of that demand continues to be directed toward pool allocated metals, with the ease of trading, absence of storage fees, and ability to trade in fixed dollar amounts of particular interest to SMSF trustees, though 1-kilo bars of silver, and 1oz ABC Bullion gold cast bars are also particularly popular.
 
The 1-kilo ABC Bullion gold cast bar, which is now worth more than AUD $100,000, also remains a go-to investment for high-net-worth investors.
 
Inside our Global Flagship, we continue to see very strong demand for ½ ounce gold cast bars and 1-ounce, as well as our signature 1oz ABC Bullion Eureka,  which remains the most cost-effective silver bullion coin on the market.

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.