Volatility Returns As Gold Slips Back Below USD $4,000

Financial markets have seen a renewed bout of volatility this week, with precious metals caught up in the broader market sell off. Gold, which had bounced in the first few trading days of November, is again on the back foot, with prices falling back below USD $4,000 per troy ounce (oz) in the past 24 hours.

The latest sell off is a continuation of the challenging 9-month consolidation period that we have seen for precious metals. Gold is trading almost 30% below the record highs seen earlier this year, while silver is more than 50% lower, with short-term price action heavily influenced by movements in interest-rate expectations, bond yields and the US dollar.

Equity markets have also become increasingly volatile. The S&P 500 and NASDAQ both fell following the latest US inflation data, which came in hotter than expected. It has caused investors to reassess the outlook for US interest rates, with heightened expectations that we may even see a shock 50bps rate hike from the Fed in December, though this is not yet the consensus view.

One time market darling NVIDIA, which many argue is the most consequential company in the AI sector, has well and truly fallen out of favour, down 11% in the past week, and 23% in the last month.

These falls represent hundreds of billions of dollars of market capitalisation disappearing, with suggestions CEO Jensen Huang will soon be replaced, as scandal continues to plague the organisation.

The challenges NVIDIA faces couldn’t come at a worse time for equity markets, given the outsized role that the technology sector has played in recent years, not only in terms of stock market gains, but also earnings growth, capital expenditures, and employment.

Australia is also being buffeted by economic challenges, with news that iconic retailer David Jones has entered receivership, despite its 188 years of operation, with many of its stores set to close in the coming weeks and months. This news is a clear sign of the strain impacting discretionary retail in Australia, as households bunker down in the face of a generational cost of living crisis.

The housing market also continues to weaken, with Cotality data now suggesting that the current pullback in prices is the largest (at a national level) in 40-plus years.

Lending data suggests the pain may only just be starting too, with the latest statistics from the Australian Bureau of Statistics (ABS) showing a dramatic slowdown in housing finance, with the number of new dwelling loan commitments falling 15% in the September quarter.

Investor lending was hit particularly hard, with the number of new loans falling 30.6%, while the value of investor lending plunged 32.3%, the largest quarterly decline since official records began in 2002.

These developments reinforce many of the themes explored in ABC Bullion's most recent whitepaper, Gold and the Great Australian Dream. The whitepaper examines the extraordinary long-term rise in Australian property prices, the high-profile changes that are impacting the market today, and what the changing environment could mean for households and investors in Australia going forward.

Inflation and Gold – A Short-Term Paradox

While persistent inflation has typically been supportive of gold over the longer term (think the 1970s), paradoxically it remains one of the biggest short-term headwinds facing the market.

US CPI rose 0.4% month-on-month, versus expectations for a 0.3% increase, while core inflation increased 0.3% for the third consecutive month (a number that equates to more than 3.5% on an annualised basis).

The data was an upside surprise relative to market forecasts, leading Federal Reserve Governor Christopher Waller to state that a 50-basis-point rate hike may be considered in December if inflation remained sufficiently elevated.

Markets are now fully pricing at least a 25-basis-point December hike, while the probability of a larger 50-basis-point move has increased substantially, with many assets, including gold, impacted by the evolving outlook for rates.

Higher expected rates place upward pressure on bond yields across the maturity spectrum and increase the opportunity cost of owning non-yielding assets like gold. Higher rates have also supported a strong US dollar, with the DXY trading around 102.5, up by 1.4% in the last week alone, and more than 3% since mid-September. 

Gold’s recent correction, its inability to rally more substantively, and its continued flirtation with the USD $4,000oz price point have been heavily influenced by this combination of higher yields and a stronger dollar.

Long-Term Support for Bullion Is There

Despite the short-term volatility, and continued uncertainty, the gold market is supported by strong structural foundations.

Central banks purchased 321 tonnes of gold in Q3 alone, according to the World Gold Council, an increase of 42% year-on-year. Gold-backed ETFs also attracted 211 tonnes of inflows during the quarter, taking total holdings to a record 4,256 tonnes.

This follows four years in which central banks have accumulated an average of approximately 1,000 tonnes of gold annually, roughly double the average pace seen during the preceding decade.

News from Singapore this week is also instructive.

The Monetary Authority of Singapore has launched a dedicated gold custody service, which will allow foreign central banks (as well as international financial institutions and sovereign entities) to store allocated gold inside Singapore's national currency vault. The facility can currently hold approximately 500 tonnes of bullion (USD $64 billion at current prices), with capacity to expand as demand grows.

The short-term price action is uncertain, but news like this from Singapore highlights clearly that gold is being treated as a strategic monetary asset at a nation state level.

What To Look Out for Next?

While there is every chance gold and silver have already bottomed, a final washout can’t be ruled out, especially if the Federal Reserve becomes aggressive in the short-term as it relates to rates, or we see a sharp sell-off in risk assets, which may see gold caught up in a liquidity crunch, much like what happened back in 2008.

Periods like this are uncomfortable precisely because sentiment has deteriorated and prices have corrected.

But short-term price weakness shouldn't obscure the bigger picture.

Central banks continue accumulating. Government debt continues to grow, with no meaningful plan to reduce, let alone eliminate deficits. Geopolitical uncertainty will not easily be resolved.

And investors are increasingly questioning traditional assumptions around currencies, bonds and other financial assets, with equities in particular at risk given just how stretched the rally in headline indexes has been, and how concentrated major markets have become.

Given this backdrop, we believe investors will look back on this period as an attractive opportunity to accumulate physical gold and silver at substantially lower prices than earlier in the year.

The long-term investment case for bullion remains very much intact.

Until next time,

Jordan Eliseo
General Manager, ABC Bullion

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