Precious metals stabilise as recession risks build!

Jun 03, 2023

weekly gold-pricePrecious metals stabilise as recession risks build!

Gold has bounced this week; 29 May-2 June, 2023- with a 1% rise halting a losing streak that at one point had seen the precious metal give up more than USD $100oz between early April and late May 2023. In this week’s market update ABC Bullion said, precious metal prices bounced over the past five trading days week, with gold on track to break its recent losing streak, up 1% to USD $1,977 per troy ounce (oz).

Silver has also been on the rise, last trading at USD $23.90oz, up 4% for the week in USD terms, with the gold to silver ratio (GSR) currently sitting at 83. The bounce in gold has occurred against a backdrop of share market strength, at an overall index level at least (breadth continues to deteriorate, which is a warning sign for equity bulls) and a removal of tail risk given positive developments on a resolution to the US debt ceiling impasse in Washington.

While this week’s bounce in precious metal prices will have encouraged bulls, it is too early to say this correction is definitively over. Net positioning in the gold futures market at risk of unwinding further, while a range of technical indicators suggest gold could struggle short-term, in USD terms at least.

This downside, should it eventuate, would likely be modest (and a good chance to add to positions) with strong support expected in the mid to low USD $1900oz range.

Given this backdrop, it’s no surprise to see mixed commentary regarding gold in the market right now, with Standard Chartered noting gold could again test all-time highs shortly, though they see headwinds on the horizon, while PIMCO believe gold may be challenged short-term, but that its appeal as a long-term investment remains intact.

Moving on from the daily gyrations, and there is no doubt that one of the key developments in the gold market in the last two years has been the rapid rate of accumulation by central banks. These entities, which as a collective turned net buyers at around the time the Global Financial Crisis hit, bought more than 1,000 tonnes in gold in 2022.

While there is no doubt this segment of the market has provided solid support for gold bullion, and likely will continue to do so for the foreseeable future, it doesn’t necessarily correlate that well to gold prices. Retail demand, for bars and coins like those we sell at ABC Bullion, as well as for gold ETFs tends to correlate far more closely with gold prices, as the following chart from a recent Longview Economics update highlights.

Longview also noted that the correlation between real yield and gold prices increases significantly during recessions. This will be another factor for investors to watch going forward, with recession risk rising, and this week’s gold bounce coinciding with a 0.13% fall in real yields on 10-year US treasuries.

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