New highs for Australian dollar gold in sight

In this week's market update:

• Precious metals remain in consolidation mode, with gold and silver off by -1% and -2% respectively in USD terms over the past five trading days.

• Despite the consolidation, prices look well supported, especially in Australian dollar terms, with gold at one point trading near AUD $3,030 per troy ounce (oz).

• The gold to silver ratio (GSR) edged higher over the past week, and is now sitting at 80. For the month, it has declined, from 83, which is typically a positive sign for the precious metal sector.

• Gold and silver’s performance was particularly robust given broader weakness across the commodity spectrum, with the Bloomberg commodities index off by -3% over the past five trading days, with oil falling by the same amount.

• Other markets were relatively stable, with bond yields and equities largely unchanged, with the bigger move seen in cryptocurrencies, with Bitcoin +5%.

A new gold standard!

Gold and silver remained well bid this week, with gold in particular seeing strong buying interest.

That is despite the continued consolidation in the precious metal complex, with gold spending much of the week trading near USD $2,000oz, before pulling back from those levels in the last 24 hours.

So far, gold has managed to stave off any more meaningful price retreats, so the overnight pullback may yet be another short-term blip, while silver is also well supported, last trading at almost exactly USD $25oz.

The resilience in gold stands in contrast to what we have seen across the broader commodity spectrum, with oil again under pressure (-3% over the past five trading days and again back below USD $75 per barrel, while the Bloomberg Commodity Index also fell -3%.

Given the strong performance of gold and silver in recent times, and the warning signs of a pending recession (the Conference Board’s Leading Economic Index continues to fall in the United States, and is now at lows last seen in late 2020), it is no surprise we continue to see ever more investment commentary about the merits of holding precious metals in a portfolio.
This week that includes an article from Lombard Odier, titled: “Real demand pushes gold towards a new standard”.

The article rightly notes that:

• Financial stresses have translated into gold trading at near-record levels.

• Central banks, including China, have added to their gold reserves as they diversify away from dollar assets.

• Recession risks and banking turmoil have contributed to recent price rises. Medium term, we see prices supported by falling US real rates and a weakening dollar.

Interestingly, Lombard Odier, in the article, noted that they had raised their gold price target to USD 2,100/oz by the end of 2023.

In the short-term, articles like this, combined with news that searches for “how to buy gold” have hit record their highest level in 20 years, can actually be a warning sign (highlighting that gold is too popular), though over the medium to long-term, more awareness about, and investor interest in gold should translate into higher demand, and higher prices.

Gold corrections and fighting the last war

There can be no doubt gold is popular right now, witnessed by the Google searches on how to buy as mentioned above, the fact prices are near all-time highs in USD terms, and by rising allocations to the metal in investor portfolios.

Despite that backdrop, there is a pervasive sense of nervousness amongst certain sections of the gold investment community, with many expecting the precious metal to fall significantly when or if the US tips into recession or experiences a resurgence in the banking stresses we saw emerge a month or so ago.

This nervousness is understandable. When the Global Financial Crisis (GFC) hit in 2008, gold, which had been surging higher (like it is now), hit a major speedbump, at one point falling by nearly 30% in that year.

Given that happened when the GFC hit, it is obviously impossible to rule out such an event occurring again.

There are however several points worth making, which help highlight the difference between that environment, and what we face today. Most notably:

• Gold had surged in the two years prior to the GFC hitting, rising by more than 60% in USD terms between 2005 and 2007. It was red hot and in need of a correction. This time around, gold (and other precious metal investments including silver) have been in a near two-year bear market, as per the below chart sourced here.

• While gold took an intra-year hit in 2008, it still ended the year positive in USD terms (+3%), and much higher in AUD terms (+30%)

• This performance, which was particularly impressive in AUD terms, looks even better when contextualised in that it occurred during a market environment where risk assets like stocks fell by more than 50% at one stage.

Given the above, those shying away from gold today may find themselves ending up as generals that fought the last war, waiting for a major gold correction in the months to come that may never eventuate.

Indeed, even if that correction does eventuate, history suggests that not only will it likely prove temporary, but that gold may well outperform most other assets even through that period, as well as in the rebound to follow.

The Pod of Gold

On April 18th, my colleague Nicholas Frappell, Global Head of Institutional Markets for ABC Refinery, appeared in the latest episode of The Pod of Gold.
Nick provided key insights into a number of trends impacting the gold market, either directly or indirectly, including the strong wholesale demand we are seeing, which has continued despite the surge in price back toward USD $2,000oz.

Other factors discussed include:

• How managed money positioning in the gold market has changed.

• Why silver is following, rather than leading gold higher.

• Changes in the outlook for monetary policy, and why the Fed will struggle to push rates much higher.

There is also some meaty discussion on the outlook for the Australian dollar, which is obviously critical in determining the price direction for gold for local currency investors.

On that note, while the short-term moves are always hard to predict, it is an exceptionally rare circumstance where the AUD does not weaken, and often materially, against the USD, in environments where we enter a global economic slowdown or indeed recession.

Given the rising risks that we are headed in exactly that direction, it is even more reason to be bullish on gold full-stop, but especially in Australian dollars.

Inside the office this week

Turnover across ABC Bullion including our Global Flagship store at 38 Martin Place Sydney has remained at elevated levels over the last week, continuing a theme that dates back over a month to the collapse of Silicon Valley Bank in the United States.

We are now seeing record levels of demand for our ABC Bullion Gold Saver account, while demand for our signature 1oz ABC Bullion gold cast bars and 1 kilo ABC Bullion silver cast bars also remains robust.

Given the strength in precious metal prices, we continue to see strong two-way trade, with some investors taking profits on their precious metal positions. We expect these trends to continue for some time to come, with the high liquidity that precious metals offer a particularly favourable attribute in the current investment climate.

The ABC Bullion 1oz 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.