The longest losing streak

In this week's market update:

• Gold prices fell over the past five trading days, falling 2% to below USD $1,650 per troy ounce (oz), as the precious metal racked up its seven straight monthly price decline

• Silver rose modestly, up 1% and holding the USD $19.5oz level, with the gold to silver ratio (GSR) falling from 86 to 83

• Interest rate movements dominated the landscape this week, with the US Federal Reserve (Fed) hiking rates by 0.75%, while the Reserve Bank of Australia (RBA) implemented its second consecutive 0.25% rate rise.

• Bond yields rose leading into the Fed decision, with US 10 years up 0.18% over the past five trading days, now sitting at 4.13%, with prices for these bonds off 2%.

• Equity markets were mixed, with the S&P 500 down -2%, while the ASX 200 was flat. Crypto prices were steady, with Bitcoin holding above USD $20,000.

  

No pause no pivot

Central bank policy decisions dominated the financial landscape this week, headlined by the US Federal Reserve, who raised benchmark interest rate by 0.75% to 3.75-4.00% at their latest Federal Open Market Committee (FOMC) meeting.

While the hike was in-line with market expectations, investors and analysts were more interested in the language that surrounded the decision, with many commentators believing the Fed will soon pivot from the aggressive rate hiking stance they’ve adopted over the past few months.

While it’s inevitable the pivot will eventually come, Jerome Powell, Chairman of the Fed, made it clear it’s likely still a long way off, using a question and answer session that followed the FOMC meeting to highlight that the Fed is seeing little to no sign that inflation is meaningfully easing.

Driving home the point, he pointed out that the Fed are likely some time away from even pausing interest rate hikes, let alone pivoting to easier monetary policy.

Based on the commentary about a supposedly imminent pivot leading into the meeting, the message from Powell may be seen by some as a shock for markets, and indeed the S&P 500 did end up falling by 2.50% on the day the FOMC decision was announced, with another 1% loss overnight.

In reality, this pullback was likely more driven by the fact the market had rallied hard in the prior few weeks (the S&P 500 was up 8% in October alone) rather than anything the Fed said this week specifically, with markets by and large continuing to price in tighter policy leading into the Fed meeting, and in its immediate aftermath.

This is illustrated in the below chart (sourced here), which shows how implied Fed funds rates have moved in the last few months, and currently suggests rates will peak at more than 5% by May 2023.

My colleague Nick Frappell also discussed interest rate market pricing in his recent ‘Pod of Gold’, which was published on October 27th, with Nick noting that despite the rhetoric from some commentators, markets were priced for the Fed to stay in an aggressive rate hiking mode.

Given developments this week, it seems clear that for the foreseeable future, the dual headwinds of persistent inflation and tighter policy will challenge any attempts by equity market bulls to stage a sustained breakout.

The below chart (sourced here) which highlights that 2022 has been a year to ‘sell the rallies’, all of which have proved ephemeral so far, indicates that the market remains in a bearish trend, with the circa 5% pullback we’ve seen in the S&P 500 since the Fed meeting suggesting we may see more downside in the next few weeks.

The Reserve Bank of Australia also hiked interest rates this week, implementing their second straight 0.25% rate rise on Melbourne Cup Day.

Some commentators were expecting the RBA to hike by 0.50%, especially as their own forecasts now seem to suggest both a higher peak in headline inflation (they think it will hit 8% by Christmas) and a longer timeframe for inflation to return to more sustainable levels, relative to their prior forecasts.

Indeed, given developments in the last month, there seems little doubt that had the RBA hiked by 0.50% in October, they’d have followed through with another 0.50% hike this week.
Regardless of speed, the RBA, much like the Fed, have left little doubt they’ll stay in inflation fighting mode as we head into 2023, with RBA governor Philip Lowe describing inflation as an evil scourge that must be dealt with sooner rather than later.

And while it remains to be seen where the cash rate in Australia will top out, futures market pricing as of the 2nd November suggest it won’t peak until November next year, when it’s set to top 4%, implying there is several more months of rate hikes to come.

Back to the Fed, and the impact of their decision and statements was also seen clearly in precious metal markets, with gold, which had initially surged toward USD $1670oz, pulling back sharply in the last 48 hours.

Silver was also impacted, dropping from above USD $20oz, with prices for local investors in both gold and silver faring better due to a 2% decline the AUDUSD FX rate.

The weakness in USD precious metal prices since the Fed meeting represents a continuation of a multi-month pullback in the sector, though silver’s recent strength relative to gold is one sign that the market may be approaching a turning point.

That turning point is certainly due, for as we highlight below, precious metal bulls are currently enduring one of the worst runs on record.

The worst run since we left the Gold Standard

The gold price in USD terms has now fallen by almost 20% exactly since the peak seen in early March of this year. Since the end of March, the precious metal has fallen in every subsequent month, a seven month losing streak that marks gold’s worst performance since at least 1968 (see chart below, sourced here).

Deutsche Bank analysts stated it’s the worst performance for bullion since the late 1860s, though they acknowledge prices were fixed for much of the time period between then and the early 1970s.

The poor performance of gold in USD terms has obviously impacted sentiment, which remains near all-time lows, while there is much commentary surrounding gold’s supposed demise as a safe haven, some of which was covered in a recent podcast titled “What’s wrong with gold?” hosted by Julius Baer.

While the headwinds that have held gold back, from a surging US dollar to higher nominal and real bond yields are well known, they will eventually dissipate.

Furthermore, on a relative basis, bullion continues to hold up well, with Deutsche strategist Jim Read, who was commenting on its recent losing streak noting that; “on a relative basis, it’s performed better than virtually all other global assets.”

That’s worth keeping in mind when assessing one’s bullion holdings, or commentary surrounding its performance in 2022.

Central bank’s stockpile gold at record pace

While the gold ETF market sees continued outflows, and managed money speculators in the futures market remain significantly net short, there is one set of buyers that are aggressively adding to their positions.

That group is central banks, who in Q3 of 2022 added almost 400 tonnes to total holdings, which can be seen in the chart below. The purchases are more than four times the amount bought in the same period last year, with total purchases in 2022 the highest for any given calendar year since 1967, according to the latest global demand trends report issued by the World Gold Council.

While it’s unlikely this pace of acquisition will be maintained, there seems little doubt that central banks will remain net buyers, given the broader geopolitical and market environment, with the Dutch central bank even going so far as to say a gold revaluation could be used if there are ever any concerns regarding the institutions solvency.

We’re not suggesting the situation the Dutch central bank alluded to will transpire, but a statement like that, combined with their comments that they’re ‘definitely not going to sell’ their gold do speak to the enduring importance of the metal at a nation state level.

Moving forward, strong central bank buying, combined with robust retail demand (gold bar and coin buying was +36% in the year to end September 2022), and the potential for a return to inflows from gold ETFs all speak to a more positive outlook for gold as we head toward next year.

Should this happen, the USD gold price correction that we’ve seen in the last few months will ultimately be remembered as a corrective phase within a longer-term bull market, and a wonderful buying opportunity.

Inside the office this week

This week saw high demand for 1oz Silver Britannia coins and the ABC small gold tablet range. Clients, many of whom are first-time buyers, advised they were becoming more cautious about financial markets and the economy, which was a major factor driving them to invest in gold and silver.

Warm regards,

The ABC Bullion Team

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