This looks like a gold bull market

Summary

• Precious metal prices stabilised this week, with gold (+1%) and silver (-1%) consolidating gains seen in early November

• Local precious metal prices were also relatively stable, with gold flat while silver was down 2%, with continued strength in the Australian dollar keeping a lid on prices

• Equity markets were mixed, with the ASX continuing its recent rally, up another 2% over the last five trading days

• Commodities, have come under pressure, most notably oil, which has fallen 6% in the last week, last trading back near USD $80 per barrel

• Bond yields have continued to retrace part of the monster surge that we’ve seen over the last year, with 10 - yields in both Australia and the US back below 3.80%

• Cryptocurrency markets remain fragile, with Bitcoin of another 5% in the last week

Let’s get physical
Markets were relatively calm in the past week, with bond yields continuing to ease and the US dollar (USD) continuing to ease, while equity markets and indeed the precious metal market have consolidated recent gains.

For precious metals, this consolidation is a healthy sign, given gold had rallied the better part of 10%, while silver had rallied 15% between the end of October and the middle of November.

Short-term price action aside, we remain optimistic on the outlook for precious metals, with the below chart from the World Gold Council highlighting how robust demand is for gold bars and coins.

This strong retail demand, combined with record levels of central bank buying point to a very strong underlying bid for the precious metal, with physical buyers happy to add to their gold holdings at or near current prices.

Combine this with the potential for gold ETF investors and gold futures market participants to return to the market in size, and you have the potential for a very strong rally from here, with John Reade, Chief Market Strategist from the World Gold Council stating on November 16th that in his career “the most interesting opportunities in gold have happened when financial markets are short/disinterested in gold AND when physical demand for gold is strong.”

That’s exactly where we sit today. It looks like a bull market.

From a technical perspective, gold also looks like it may have bottomed around late October, with Jordan Roy-Byrne of The Daily Gold noting that sentiment indicators, speculative positioning, and the performance of both silver and mining stocks suggest the two year correction in precious metal prices is over, even though volatility will remain a feature going forward.
Looking forward, gold’s role in wealth management is likely to grow, given the challenges that investors in traditional assets will continue to face. Ronald Stoeferle from Incrementum discussed these issues recently, noting that;

• Bonds are no longer the anti-fragile portfolio foundation

• The negative correlation of stocks and bonds now looks like a myth

• Gold acts as an effective stabilizer in diversified portfolios

Given it’s limited, and more importantly stable total supply, any additional demand from investors wanting to hold gold as part of their asset mix can’t help but be supportive from a price perspective.

Recession watch and the Australian dollar
The Australian dollar (AUD) has enjoyed a decent rally in the last month, rising by 8% vs the USD, and last trading back above USD 0.67.

Several factors have contributed to this AUD rally, not least of which was the fact that the USD itself was overdue for a correction, after rising by almost 20% in the year to end October, hitting multi-decade highs against the Euro, the Yen, and Pound Sterling in the process.

Expectations that China will ease COVID related restrictions have also helped boost the AUD, while strong employment data, which showed the unemployment rate falling to its equal lowest since 1974, strengthen the case for the Reserve Bank of Australia to continue tightening monetary policy in the coming months.

Given this backdrop, it would not surprise to see continued strength in the AUD, at least in the short-term, which has the benefit of lowering AUD gold and silver prices for those looking to build their holdings.

Over the medium-term, the outlook for the AUD remains more questionable. For despite the recent strong employment data, Australia is facing a range of headwinds, including;

• Negative real wage growth, given currently elevated levels of inflation

• Mortgage pain, with repayments set to increase in 2023 as rates continue rising

• Poor consumer sentiment, with spending intentions declining

• Continued falls in housing prices, which are on track to decline by 20%

Combined, this leaves Australia in a precarious position, with economists at National Australia Bank stating we are potentially headed for a per capita recession.
 
Should that transpire, Australia will likely be in good company, with the United States also set to tip over into recession in the next twelve months. Indeed, as per the chart below, a recession is now the consensus outlook based on the latest Bank of America Fund Manager Survey.
 
As Callum Thomas, who shared the below chart in his weekly chartstorm notes; “While you sometimes want to go against the consensus, the chart goes to illustrate how the crowd often gets it right on the way into a changing situation.

These recession fears can be expected to act as a headwind for the AUD going forward, especially if commodity prices tumble, with the end result being more upside in precious metal prices for Australian investors.  
 
A final word on crypto for now
The news continues to get worse for the cryptocurrency industry, with the collapse of cryptocurrency exchange FTX continuing to reverberate across financial markets.

The fact Bitcoin has only fallen another 5% in the last week, and is still trading above USD $16,000 per coin, is something of a surprise given the recent news flow, though their remains a strong likelihood that prices will continue to trend lower, especially if another high-profile exchange, or stablecoin project goes under soon.

This may well happen, with news that crypto lender BlockFi is set to file for bankruptcy, while questions about what really backs Tether, the largest so called stablecoin in the cryptocurrency ecosystem continue to build, with Kyle Bass for example noting that he hadn’t “been able to find a single dealer who says they do business with Tether.”

Suffice to say that given the current question marks over the cryptocurrency ecosystem, there are few retail investors, and even fewer institutional investors who continue to compare Bitcoin to gold.

Gold’s resilience in the face of higher yields and a higher dollar, its outperformance relative to other assets, its exceptional liquidity and the robust ecosystem it trades in are all strengths that have come to the fore in 2022, reminding investors why its a premiere safe haven asset. Crypto by contrast has crumbled.

For those interested in a deep (and long) read on the FTX saga, Myrmikan Research have recently released an article titled Crypto contagion, which you can access here.

Inside the office this week
Clients continue to build their precious metal holding, with a notable uptick in sales of ABC’s 1kg Gold Cast Bar and the ABC 5kg Silver Cast Bars. From diversification, to inflation protection, to building house deposits and preservation of generational wealth, gold and silver remain as popular as ever.
Warm regards,
 
Jordan Eliseo
General Manager
ABC Bullion Australia

The ABC Bullion Team
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