The pullback we’ve been waiting for!

In this week's market update:

• Precious metal prices fell sharply late last week, with stronger than expected employment data out of the United States enough to send gold well below USD $1900 and silver below USD $22 per troy ounce (oz).

• This pullback was not unexpected, with both precious metals, most notably silver, having previously failed to push beyond important price levels that were critical to maintaining short-term bullish momentum.

• Precious metals weren’t the only market hit, with bond yields rising (the price of 10-year US treasuries fell 3%), equities down, and cryptocurrencies also falling.

• A rally in the US dollar contributed to the broader risk-off theme, with the dollar index (DXY) rising by 1%, with markets pricing in higher interest rates given broadening inflationary pressures.

A buying opportunity for gold investors

Precious metal prices fell sharply over the past five trading days, with gold and silver down by 3% and 6% respectively in USD terms. Local currency investors fared better, with a 3% decline in the value of the Australian dollar, which is now back below USD $0.70, meaning gold was flat over this period in AUD terms, while silver was only off 3%.
The catalyst for the sharp pullback was last week’s incredibly strong non-farm payroll data released in the United States, which suggests more than 500,000 jobs were created in January, which was three times higher than economists and analysts were predicting.

While there is a slew of economic data, from stubbornly high inflation, to inverted yield curves, to crashing PMI data and declining consumer confidence, all of which suggest a recession in the United States is likely, it’s so far not showing up on the jobs front, with companies still adding to their workforces.

Back to gold and the broader precious metal sector, and while the violent sell off that took place last Friday may have surprised some, it won’t have come as a shock to those that follow the market closely, with signs the market was due for a pullback evident in the past few weeks.

Indeed, it’s something we have warned about in our weekly reports for ABC Bullion clients, including last week’s update.

On a forward looking basis, precious metals will now look more attractive to many investors, having pulled back by several percentage points, with some of the recent froth no doubt now gone from the futures market.

The list of factors likely to provide support going forward include:

• The fact that inflation remains high (above 6% in many countries as per a recent IMF blog) and is showing signs of stickiness, with a diffusion index suggesting more than 80% of inflation categories are now above 3.5% per annum in Australia, while items like global container freight rates are already down 80% from their peak, and are likely to soon stabilise

• The fact that despite the continued inflationary pressures, markets are still pricing in a collapse in inflation in both Europe and the United States, with 10-year breakeven rates still below 2.50%

• The lack of buying interest from gold ETF investors, evidenced in a recent World Gold Council update that noted that ETF investors had so far “shunned the rally” in gold that took place from the November 22 lows up until the recent pullback began. This is in stark contrast to prior upswings in metal prices, when ETF investors usually aggressively add to gold holdings, and is another factor showing the lack of exuberance in the gold market at this time. This sector of the market will eventually return, in volume, on the demand side.

• A surge in bullish activity chasing risk assets (mostly equities) higher, with recent daily call option volume hitting an all-time high, while fear and greed sentiment readings suggest investors are now in the ‘extreme-greed’ territory.

Last but not least, the portfolio case for gold remains robust, something Tom Stevenson from Fidelity International discussed in an early February blog post that noted several reasons to hold the precious metal. These include but not are not limited to:

• Gold’s ability to act as a portfolio diversifier.

• Gold’s stability over long periods

• Gold’s strong performance in periods of high inflation

• Gold’s ability to hold its value during times of stress

Given these factors, many investors will no doubt see the past week’s pullback in precious metal prices as a great buying opportunity, and will be happy to add to their portfolio allocations.

Three decades of gold demand

In late January, the World Gold Council released a fantastic report, titled “30 years of gold demand trends”, which looks at demand figures from 1992 to 2022.

The report looked at the evolution of the gold market over this time-period, with Louise Street, senior market analyst at the World Gold Council also doing a 15-minute video to talk through some of the key findings.

A key standout when looking at the market is the huge increase in physical bar and coin demand (the part of the market ABC Bullion specialises in), which has gone from roughly 10%, to more than 30% of total demand in any given year. This can be seen in the chart below.

Other key findings from the report include:

• The huge growth of Chinese and Indian demand, which has risen from circa 20% to roughly 50% of total gold demand in any given year

• How the GFC changed the face of gold demand, with Europe in particular seeing a surge in bar and coin demand since the GFC hit 15 years ago. Prior to the GFC, bar and coin demand in Europe was closer to 50 tonnes per annum. It jumped to 250 tonnes in 2008, and has remained at those levels since.

• The 180-degree pivot from central banks, who were net sellers in 1992 and every year up until the GFC hit. Since then, they’ve been net buyers every year

• Gold’s exceptionally strong performance over the past three decades, in which has outperformed bonds, cash and commodities

The report makes it clear that the outlook for gold demand remains incredibly strong, which will continue to support the role it can play in portfolios, irrespective of its day-to-day volatility.

No credit where it's due

While most media attention has been focused on the bounce in equity markets in the past three months, the bigger news is in the bond market, where credit spreads have dropped to near record lows.

This is evident in the chart below (with an apt title noting that it’s a sign of greed) sourced from a recent Bank of America Merrill Lynch survey.

The chart highlights the fact that the spread between BBB rated US corporate debt and 90-day US Treasury bills is sitting at levels seen in before the Great Depression commenced in the late 1920s, the mid 1960s, the early and late 1970s, just before the GFC hit in 2007, and again in February last year.

These periods all coincided, or near coincided with tops in risk assets, and were typically a good time for investors to seek exposure to safe haven assets, including physical gold.
There is little reason to think this time will be different, with data like this another supporting argument as to why investors may wish to hold gold in their portfolios today.

Australia – short on confidence, high on rates

The big news in Australia this week was of course the decision made by the Reserve Bank (RBA) to increase interest rates by another 0.25%.

The increase, their ninth in a row, brings the cash rate to a multi-year high of 3.35%, with the promise of more to come, with markets now pricing in a peak in the cash rate of 3.97% in September this year.

This suggests the RBA will remain in rate hike mode for most of this year, with risks on the interest rate front pointing firmly to the upside given the ongoing threat posed by high inflation, and near record low unemployment rates, which will give the RBA comfort they can continue to tighten.

One factor that may tempt the RBA to take a more cautious approach is the outlook from the consumer's perspective, with confidence levels declining rapidly in the last years.
This can be seen in the below chart, sourced from ANZ-Roy Morgan, which shows confidence levels heading toward (though not quite reaching) lows seen when COVID first hit, with last week recording the biggest weekly fall in six months.

That’s not a great sign when it comes to the outlook for retail sales, company earnings, and therefore the overall health of the share-market.
Given historical data suggests share market returns tend to be best when unemployment rates are high, this is yet another factor that may encourage investors to:

• lighten their exposure to risk assets.

• bolster their portfolio with safe havens like physical bullion.

Inside the office this week

This week has all been about ABC Bullion 50-gram gold cast bars, which continue to be one of our most popular products. ABC Bullion 250-gram gold bars have also been bought in number, typically by larger investors like SMSF trustees, who are making allocations as part of their portfolios.

We’re also seeing very strong demand for ABC Bullion 1-kilo silver cast bars and 1oz ABC Bullion silver Eureka coins.

Finally, we continue to see activations for the ABC Bullion Gold Saver, no doubt encouraged by our soon-to-end promotion (Feb 15th is the last day), with one lucky Gold Saver customer set to win $1,000 in gold.

The ABC Bullion 50g 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.