Third time lucky for gold

In this week's market update:

• Precious metals remained on the defensive this week, with gold down by 1% and falling below USD $1,950 per troy ounce (oz).

• Silver also continued to slide, down 3% to USD $22.70 oz, having now fallen by 10% in the last month, with the gold to silver ratio (GSR) rising to 85.

• Prices for Australian investors have been supported by continued weakness in the Australian dollar, which fell 2% over the past five trading days, with the AUDUSD FX rate now sitting just above USD $0.65.

• Equity markets were on the backfoot, with both the S&P 500 and ASX 200 down 1%, despite a 20% surge in the stock price of tech company NVIDIA, which almost singlehandedly kept markets in the green this week.

• Bond markets also continued their recent sell off, with 10-year yields on US treasuries now back above 3.8%. The move higher in bond yields, which has coincided with stagnant inflation expectations has seen real yields on treasuries soar in the past month, which has been a major contributor to recent gold price weakness.

Gold bulls are on the backfoot again this week, with the precious metal falling below USD $1,950oz, while silver is back below USD $23oz.

The correction, which began approximately one month ago, has taken much of the heat out of the gold market, with multiple factors, from a rising US dollar to a surge in real bond yields playing their part in pushing gold down.

Price wise, gold has now made several attempts to decisively crack through the USD $2,000 per troy ounce price level, each of which has failed (so far).

Gold first approached these levels more than 10 years ago, briefly trading above USD $1,900oz back in 2011. It then began a four-year bear market which saw it at one point retreat below USD $1,100oz in late 2015.

The precious metal again made a run for the USD $2,000oz price level in 2020, when attempts to stimulate the global economy, while at the same time shutting it down to stop the spread of COVID caused gold to surge.

In recent weeks, gold had a third attempt to push above the USD $2,000oz level, but has again failed to hold it, with the precious metal trading just below USD $1950oz today.

The repeated attempts and failures to hold this price level has led some to pose the question, or point out the risk that we could be seeing a triple top play out in the gold market.

While that is possible, the gold market is in a much healthier position now, especially compared to 2011, but also relative to where the market was sitting almost three years ago.

Consider that:

• The US was in the early stages of what turned out to be the longest expansion on record back in 2011. This time they are headed toward recession.

• Inflation was at multi-decade lows over a decade ago. It is falling now, but from multi-decade highs.

• Stock markets were recovering from a GFC induced generational wipeout in 2011, with the S&P 500 closer to 1,300 points back then, vs. more than 4,000 points today.

• Gold ETFs dominated the ETF landscape in the US back in 2011 when they comprised 8% of all ETF assets. Today they are less than 2% of ETF fund assets.

Given the above factors, gold stands a much better chance of not only pushing above USD $2,000oz, but surging even higher in this cycle, compared to the outlook in previous periods it traded near these levels.

If so, it will prove to be a case of third time lucky for gold, and for precious metal bulls.

Showdown!

Research wise, there is no doubt that the best piece of gold content available in the world right now is Incrementum’s annual ‘In Gold We Trust’ report, the 13th addition of which, titled Showdown, was released earlier this week.

Now into its 13th year, the report has become a bible of sorts for many precious metal aficionados, and indeed parts of the broader investment community, with the report typically looking at gold from multiple viewpoints.

Those viewpoints include demand trends in the precious metal sector, the role of gold as a reserve asset, the portfolio benefits of investing in gold, and where it sits from a valuation or market cycle perspective compared to financial assets.

The report also tends to feature key interviews with high profile commentators from the world of finance and banking, with this year being no exception, with financial market historian Russell Napier and ex Credit Suisse guru Zoltan Pozsar featuring.

While there are hundreds of charts and data points to look at in the report, there were two that stood out.

The first was looking at how expensive an iPhone is in gold terms, with the below chart highlighting the price of each year’s iPhone vs the USD gold price over time, and how this has evolved since 2007.

In short, despite the fact iPhone prices have risen from $599 to $1,499 in that period, in gold terms prices have fallen from 0.92 ounces to 0.75 ounces today.

Given so many people engage with ABC Bullion, and other businesses via their iPhone, it is a useful visualisation of how gold has helped protect purchasing power over the medium to long-term.

The second chart, which is far more ‘big picture’ is the one below, which looks at the ratio of the gold price relative to the S&P 500 index level.

In short, the lower this ratio, the cheaper gold is relative to equities, and vice versa.

Right now, the chart is suggesting that not only is gold about as cheap as it tends to get relative to equities today, but that the ratio is starting to rise, indicating gold is beginning to outperform.

If history comes even close to repeating, expect a multi-year bull market in precious metals.

Recession: just a matter of time

One of the factors that should support gold going forward is the likelihood of a sharp slowdown, and indeed a likely recession in the United States in the coming months, with warningsigns from a slowdown in the US housing market, to declining consumer confidence, to poor retail sales and credit contraction all suggesting it’s a matter of when, not if the US will enter a recession.

Financial markets, and the yields investors are currently receiving across the maturity spectrum also strongly suggest a US recession is all but inevitable, with the spread between US 10-year treasury bonds and the 3-month treasury rate now near record lows.

This is highlighted in the chart below (sourced from EPB research here), which plots this data series from the mid-1960s through to the present day.

As the publishers of the above chart note, this spread has inverted; “before every recession since the late 1960s with virtually zero false signals, particularly in the last five decades. The only modern false signal occurred in late 1966.”

Timing wise, economic history suggests that a recession will on average start 12 months after this spread inverts, though the range can be anywhere between 6 to 18 months, based on historical observation.

Stock market wise, recessions tend to be bad news, with equities falling on a 2–3-year basis after this spread inverts, with average declines of 14% in the 15 months after inversions like the one we are seeing today take place.

Worst case, the losses in risk assets can be worse, with some equity drawdowns seeing markets fall by closer to 50%.

If something even vaguely similar happens in the months and years ahead, expect to see gold demand, and gold prices, rise notably.

Inside the office this week

Turnover across all ABC Bullion sales channels has remained healthy throughout May, though the market has returned to more regular levels of trade activity, after the super-spike we saw from early March through to late April.

In our state offices, as well as our Global Flagship store, we continue to see strong demand for the ABC Bullion cast bar range, especially ½ ounce ABC Bullion gold cast bars, and 10oz ABC Bullion silver cast bars, as well as 10-gram ABC Bullion gold minted tablets.

Online, sales of pool allocated gold remain strong, as do ABC Bullion gold saver activations, with more and more Australian’s taking advantage of the dollar-cost averaging facility the Gold Saver provides.

This is no surprise given the outlook for real cash rates, with gold quite likely a more lucrative, and safer bet going forward.

The ABC Bullion 1/2oz 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.