Why Aussies are Investing More in Gold

In this week's market update:

• Gold prices eased this week, falling by 1% to USD $1,919 per troy ounce (oz).

• Silver was down 7% to USD $22.90z, with the gold to silver ratio (GSR) rising to 84.

• Australian dollar precious metal prices were supported by continued weakness in the local currency, which fell 2% to USD 0.638, with gold in AUD still trading above $3,000oz.

• Equity markets were also weaker over the past five trading days, with the S&P 500 -1%, while the ASX 200 is -2% ahead of Friday’s open.

• Oil continues to lead commodity markets, with a barrel of crude now trading just below USD $87, up 4% for the week.

• Bond yields rose this week, as did breakeven inflation rates and real yields, with the price of 10-year treasuries -3% over the past five trading days.

Gold yields to higher rates

Gold eased this week, with the precious metal falling by 1% to USD $1,919oz.

The pullback, coming after a strong bounce back in the last two weeks of August, was not unexpected given the move higher in yields and the US dollar, with gold still trading above important support between USD $1,900oz-$1,910oz, which is where the 200-day moving average for the precious metal currently sits.

These drivers of gold were discussed by the World Gold Council in a 6th September market update; with the WGC’s GRAM (Gold Return Attribution Model) suggesting that “changes in 10-year yields, the US dollar and COMEX futures positioning were key headwinds for gold in August. US 10-year Treasury yields hit a 16-year high during the month, fuelled by rampant speculation over a possible Fed re-assessment of the US neutral rate.The growing expectation for ‘higher for longer’ rates (above 4%) is, in essence, a reflection of how persistent inflation and economic resilience continue to be. Dollar strength, meanwhile, was likely supported by concerns over China’s housing market, as well as broad struggles in export-dependent currencies such as Europe and China.

While higher rates are set to remain a headwind for gold for some time, it has more than weathered the challenge, with it up by 7% in USD terms to end August. The move is even more powerful in Japanese YEN, with gold up by 18.8% and trading at record highs.

In Australian dollars, gold has rallied by almost 13% YTD, with part of this move fuelled by the recent pause in the interest rate hiking cycle by the Reserve Bank of Australia (RBA), which has kept rates steady at 4.10% since June.

With Australia already in a per capita recession, there is a strong chance we’ve seen the peak in interest rates for this cycle, with markets currently pricing in a long period of stability for the cash rate.

While that will help mitigate any further pain being felt by households facing higher mortgage repayments, the current cash rate is a factor putting downward pressure on the currency.

That will complicate attempts to get inflation back toward the 2% level the RBA targets, with a lower currency increasing the cost of all imported goods into the country.

The slower pace of economic growth, combined with the inflation challenge Australia is facing, and a local stock market that seems stuck at or near the 7,000-index level already appears to be impacting investor decisions in Australia. A separate WGC report looking at Australia notes “investors have been rushing out of risk assets into safer ones. According to Calastone, equity, multi asset and property funds saw major outflows throughout H1 2023, while fixed income funds added A$1.3bn. In addition, there were signs of investors flocking to cash after rolling out of riskier assets.

The desire to take a more conservative approach with one’s investment portfolio can be expected to support gold in Australian dollars, and Australian dollar gold demand going forward, especially if we see continued signs of stagflation with the WGC noting that “gold in AUD has delivered a stunning 27% annual average return, significantly outperforming other assets.”
If we see a similar return from gold in the period ahead, do not be surprised to see a price near to or even above AUD $4,000oz.

When will ETF investors return to gold?

Divestment out of gold from those who allocate via gold ETFs has been a persistent feature of the market since gold first traded above USD $2,050oz back in mid to late 2023.

Since then, gold ETF investors globally have shed just over 575 tonnes from these products (circa USD $35bn in value), which amounts to 15% of total holdings.

The lack of investor appetite for gold in ETF form continued in August 2023, with a WGC update on ETF positioning noting:

• Global gold ETFs saw net outflows for the third consecutive month in August.

• North American funds bore the bulk of outflows while Europe’s loss notably reduced and Asia led inflows.

• Although collective holdings have shed 4% y-t-d, total assets under management (AUM) rose by 3% amid a higher gold price.

The final comment from the WGC is key, in that the gold price has risen this year, despite outflows from ETFs, and a sharp reduction in net long positioning in the futures market. Typically, for gold to thrive, you need inflows from ETFs, and some support from the speculative end of the futures market.

This is evident in the below chart, which shows the USD gold price (gold line) and the sum of investor positioning (orange line), which is ETF holdings and net managed money positions, in tonnes, on the right axis.

The chart shows a strong correlation between the two over most of the last 15 years, though this correlation has disappeared in the last year or so, with the gold price very strong, despite no support from these traditional investment channels.

With volatility in markets creeping back in, yield curves warning of recession risk, and central banks still trying to squash inflation, it’s only a matter of time before ETF investors and speculators return to the gold market.

When they do, they’ll add to bullish sentiment, supporting higher prices.

Inside the office this week
 
There has been a notable boost in turnover over the past five trading days, with a gold price of just over AUD $3,000oz helping attract new investors to precious metals, and encouraging some longer-term holders to add to positions.

This heightened turnover is being seen most notably through sales to SMSF trustees, who continue to favour pool allocated metal due to its low trading costs and free storage, as well as ABC Bullion 1 kilo silver cast bars and the full range of ABC Bullion gold cast bars.

We are also seeing a huge appetite for silver coins amongst our retail client base, with ABC Bullion offering great prices on our range of 1oz silver coins, led by the 1oz ABC Bullion Eureka Minted coin, which is the most cost-efficient coin on the market.

Activations of ABC Bullion Gold Saver Accounts also continue at a brisk pace, with investors attracted to the simplicity of this product, which allows Australian’s to dollar cost average into gold and silver on a weekly, fortnightly or monthly basis, with a minimum investment of just $50.

Jordan Eliseo
General Manager
ABC Bullion Australia

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