Buying Opportunity as Precious Metal Markets Pullback

Precious metal markets saw one of their first meaningful pullbacks of the year this week, with gold prices falling below USD $2,900 per troy ounce, while silver is now trading just below USD $31.50oz.

Pullbacks of this nature are a healthy and unavoidable component of the market cycle and will help to remove some of the froth and excess speculation that has built up in the gold market in recent months.

There are multiple examples of that excess, including;

• A recent Barron’s article on precious metals, which ran with an article title; “The Gold Rally Can’t Be Stopped.” Headlines like that are always a warning sign, irrespective of which asset class is being discussed.

• Recent activity in the gold ETF market. Last week saw $4.5 billion of inflows into products last week. That is the largest weekly inflow on record.

Dynamics like this almost always precede a corrective period for assets that are short-term overbought.

Tariffs, Trade Wars and Buying Bullion.

The World Gold Council released an excellent market update for those interested in the interplay between the London OTC and US gold markets, what has been happening with leasing rates, why so much gold has flowed into the US recently, and the uncertainty caused by Tarriff related developments.

The update included the below chart, which shows the surge in COMEX gold inventories, with registered and eligible inventory rising by more than 300 tonnes and 500 tonnes, respectively.

Despite the surge in inflows of gold into the United States, the London market remains well stocked in terms of overall bullion supply, with the WGC noting that; “total LBMA reported inventories stand at approx. 8,500 tonnes, out of which approximately 5,200 tonnes are held at the Bank of England (BoE)”

Those inventory levels mean there is more gold in London today (even after the recent outflows) than there was in 2020.

Summarising the situation, the WGC noted; “Gold has not been a direct target of tariffs, but market reactions to trade uncertainty has driven a significant shift in trading behaviour and impacted the gold price. The movement of gold from London to the US, rising COMEX premiums and concerns over availability were largely the result of risk management decisions rather than true supply issues.

Now that COMEX inventories appear to be well-stocked and the backlog of withdrawals from the BoE continues to be cleared, these disruptions should ease over the coming weeks. However, this period serves as a stark reminder that even indirect trade policy concerns can send ripples through global financial markets.

This may not be the last time we see temporary distortions in the gold market. The signs are, however, that the depth and liquidity of the gold market is able to absorb – over time – most of these shocks.”

Central Banks and Price Sensitivity

The last five years have been incredibly impressive performance wise for precious metals, with gold rallying strongly once the threat of COVID (and the inflationary threat of the policy response to it) became obvious.

Over this period, it has been central banks that have been the primary driver of the overall increase in gold buying, with an 11.5% annual increase in demand from 2019 to 2014.

This was something JP Morgan commented on in a recent update, with the bank noting that; “Gold has been on a tear, climbing 12% year-to-date, nearing $3,000 per troy ounce. This follows an impressive 25.3% surge last year, edging past the S&P 500’s total return. With prices at record highs, investors are questioning what’s behind the rally and what role gold can play in their portfolios. At first glance, the rally seems puzzling, given the modest growth in overall demand over the last five years.”

 Commenting specifically on central banks, JP Morgan went on to state: “While higher real yields have weighed on demand from other sources, central banks have increased their purchases by 11.5% annually since 2019. Their accumulation, driven by the need to diversify reserves, accelerated after Russia’s foreign assets were frozen in 2022. With their share nearing a quarter of total demand, they have now become a dominant force in the market. Moreover, unlike private investors, they have been price-insensitive buyers, accumulating gold despite record highs, as they are motivated by geopolitical risk hedging rather than return optimization.”

Gold and the Stock Market

There are many reasons to hold gold in a portfolio. Exceptional liquidity, strong long-term returns, the lack of credit risk, and the protection it has provided against inflation (across the full market cycle) are four of the primary drivers for investors allocating to the metal.

Another factor though is gold’s defensive capabilities, with it typically being the best performing single asset class in periods the stock market falls.

This has led market observers to see gold as portfolio insurance, or a diversifier that comes into its own in ‘risk off’ periods for the share market.

While those observers are not wrong, the reality is that gold’s relationship with the stock market is more nuanced, in that not only does gold tend to do very well when stocks are falling, but it is also positively correlated to rising stocks.

This was something that Kristina Hooper, Chief Global Market Strategist at Invesco recently commented on recently. She was asked in an interview what message gold is sending to the market, given it's now trading near USD $3,000oz.

In her reply, Hooper noted that; “Historically, what we have seen is a pretty low correlation between stocks and gold. When stocks went up, gold typically went down and vice versa. That's changed. Now we have seen stocks go up in tandem with gold in the recent past. 

And I think that suggests that investors are using gold as a geopolitical risk hedge as something of a fiscal deficit risk hedge. And so, they are continuing to be risk-on and have exposure to equities. But they also have an allocation to gold as that hedge.

 And so it says to me, seeing gold continue to move up, is that investors recognize that risks are increasing and that they're OK with just being well-diversified and being risk-on but having that allocation, I should also say, that there are other factors impacting the rise in gold. We have price insensitive central bank buying, which I think is a significant driver. Again, is related to scepticism about the fiscal situation in the United States to a certain extent, and also as well as a reaction to sanctions.” 

This speaks to the multi-faceted drivers of gold demand, and why there can be multiple reasons to own the precious metal in your portfolio.

 Outlook for Gold

Given the recent price action in gold (not to mention discussion around Fort Knox gold audits and bullion laden cargo flights across the Atlantic) it is little surprise that there is more media attention on the precious metals market.

While there can be solid nuggets (pun intended) of information in general media articles looking at the gold market, the London Bullion Market Association (LBMA) are in a unique position to bring together genuine gold market insiders and industry experts to discuss the outlook for the market.

The LBMA did just that in a recent near 50-minute webinar which featured ABC Refinery’s Global Head of Institutional Markets, Nicholas Frappell. It is a great listen for anyone interested in the market.

From my perspective, the current pullback in precious metal markets is one to be welcomed, with the outlook for the sector remaining incredibly positive.

That view is driven by both an assessment of the macro, market, and geopolitical outlook, as well as historical observation, which so far shows that corrective periods in strong markets ultimately end, with significant upside seen in their aftermath.

This can be seen in the below chart (sourced here), which covers a near 50-year time period, highlighting gold pullbacks, and subsequent returns.

Precious metal bulls should be so lucky to see history repeat.

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.}