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Silver surges as gold hits all-time high in USD

Topics [ gold analysis Market update ]

The USD gold price hit record highs in July, trading above USD 1,960 per troy ounce. Silver also rallied strongly, up by more than 30% for the month. Declining real yields and a weak US dollar are driving the market higher, with investors increasing their portfolio allocations to the precious metals. 

Executive summary

•  Gold prices rose 11% in July to hit an all-time high in USD terms, trading at more than USD 1,950 per troy ounce.

•  Silver was an even better performer, increasing by 35% to close the month at more than USD 24 per troy ounce.

•  A decline in the USD, which fell by more than 4% during the month, and a continued plunge in real yields were the primary drivers of the precious metals market. 

•  Gold ETF holdings increased again in July, continuing their record run seen in 2020.

•  Overall gold demand has been held back by a circa 50% drop in demand from China and India in H1 2020 relative to a year ago. 

Full monthly review – July 2020 

Precious metal prices delivered one of their strongest months on record in July. Gold captured most of the headlines with prices touching a new all-time high in nominal USD terms above USD 1,960 per troy ounce toward the end of the month.

Prices have continued to climb in early August, with spot gold topping USD 2,000 in overnight trading.

The precious metal has now hit record prices in most currencies over the past few years, with the gold price in USD the last domino to fall.  

July 2020 also saw other markets making records, with the S&P 500 ending the month at an all-time high and the US 10-year treasury yield finishing the month at an all-time low. 

Whilst gold has now risen by almost 30% for the year, silver was the star performer in July, rallying by an incredible 35%. From the lows seen in late March 2020, silver has almost doubled in price and is now outperforming gold on a calendar year-to-date basis. 

AUD returns for gold and silver were modest, with the metals gaining 6% (gold) and 28% (silver) respectively in July. The smaller gains are a result of the continued strength in the AUD, which ended the month above USD 0.72, having now rallied by more than 30% vs the USD since its late March lows. 

The strong moves in precious metals seen in July were driven by multiple factors. These included weakness in the USD, a continued decline in the real yield on US Treasuries and rising market concerns regarding the economic impact of the steps being taken to slow the spread of COVID-19. 
This report addresses some of those factors.

USD weakness boosting gold

The USD index fell by more than 4% in July, its largest monthly decline in a decade. Various factors, including rising political uncertainty in the lead up the US Presidential election and a more than 30% decline in US GDP in Q2, contributed to the fall. 

Mounting concern about the long-term implications of the fiscal and monetary policy support being deployed into the US economy was also a contributing factor. A more than USD 2 trillion rise in the US budget deficit over the past year is being matched dollar for dollar with an increase in the holdings of US Treasuries sitting on the balance sheet of the US Federal Reserve. 

The weakness in the USD has been a tailwind pushing gold higher since late March. This can be seen in the chart below which shows both the gold price in USD and the USD index since the end of December 1999.

Source: The Perth Mint, Reuters

The chart highlights the fact that a weak USD is typically beneficial to gold, though it’s important to remember that gold is not dependent on a weak dollar to perform well. 

As an example, from the end of 2017 through to March 2020 the US dollar increased by approximately 10% while gold rose by more than 20% over this same period. 

Whilst a short-term snapback in the USD would not surprise, it appears as if there are now multiple headwinds conspiring to push it lower following a multi-year bull market that saw it gain more than 35%. 

Should a prolonged period of USD weakness eventuate, it will be another element of support for precious metal prices. 

Real yields continue to fall

Whilst the fall in the USD gained lots of attention in July, the continued decline in real yields on US treasuries was arguably an even bigger driver of the gold price. 

As a non-yielding asset, it should be no surprise that, all other things being equal, gold would tend to perform best when real yields on other assets fall, as it lowers the opportunity cost of investing in gold. 

The following chart plots the price of gold in USD and the real yield on the US 10-year treasury bond (which is inverted on the chart). It highlights how important real yields are to the gold price, with a very strong correlation over the past 15 plus years. 

Source: The Perth Mint, US Treasury, Reuters

Ending July 2020 at -1%, the real yield on US 10-year treasuries has never been lower, falling from +0.91% in September 2018. Since then, the price of gold has increased by almost 65% in USD terms. 

Gold ETF holdings continue to grow

At the time of writing end of month figures for July were not yet available, however data to the 24 July highlighted continued inflows into gold ETFs globally, with holdings increasing by more than 130 tonnes for the month so far. 

Australian investors remain a key driver of these inflows, with Perth Mint Gold (ASX:PMGOLD) seeing total holdings rise by more than 5% in July. 

Portfolio allocations to gold remain modest

Despite the surging price, and increase in demand for gold seen in 2020, investor allocations to the precious metal remain modest. 

This is a theme we explored in a detailed Livewire Markets article last month, where we presented ETF data that suggests portfolios have a less than 0.50% allocation to gold at present. 

Gold to silver ratio plunging 

Silver’s rise in July saw the gold to silver ratio (GSR) decline to just above 80:1 by the end of the month. July also saw silver ETFs record some of their biggest inflows in more than five years as investors increased their exposure to the metal.

Whilst a one month move of more than 30% is unusual, it needs to be looked at in the context of the violent sell-off seen in silver during March 2020. During that month, silver prices fell toward USD 12.00 per troy ounce, a decline of over 25%, which saw the GSR peak at more than 120:1.

This can be seen in the chart below, which plots the GSR on a monthly basis from the end of December 1999 to end July 2020, as well as the average GSR over this same period. It also shows the average GSR from 1970 to 2020.
Source: The Perth Mint, Reuters

Although we wouldn’t be surprised to see silver spend some time consolidating recent gains, a current GSR of more than 80 suggests that, relative to historical levels, it remains cheap compared to gold, even after the huge move seen last month. 

Retail demand weak

Whilst investment demand for gold in ETF form is running at all-time highs, other areas of the market are weak. The most notable is gold jewellery demand, which in H1 2020 totalled just 572 tonnes, down 46% relative to the figures seen a year ago. 

This is no surprise given the impact that COVID-19 has had in Asia, with higher gold prices and a reduction in disposable income understandably impacting demand. 

Total bar and coin demand also softened, coming in just below 400 tonnes in H1 2020, down almost 20% relative to the prior year. This was largely driven by very large falls in demand from Asia and the Middle East (off more than 50% in some countries in Q2 2020) with Europe and North America actually seeing rising demand. 

What’s next – caution in the short term

Whilst no one can be certain how markets will play out in the years to come, we doubt this will be the last time price spikes of 20-30% in a month for silver are seen, or the last time gold moves up by more than 30% in barely six months. 

Nevertheless, it’s also important to realise that no market moves in a straight line. 

To that end, whilst gold and silver’s incredible price strength and rising popularity as investments should be celebrated, investors should not expect gains like this to be repeated month in, month out. 

Indeed, with gold now having had an almost two-year run without any meaningful correction, and with investor bullishness soaring in light of the overnight move in gold above USD 2,000 per troy ounce, caution is warranted in the short term. 

A period of consolidation in which the metals potentially give back some of their recent gains is not unexpected. Should this occur, it would actually be a healthy thing for the market, helping shake out some of the froth that has built up in the past few months. 

Over the medium- to long-term the outlook for gold and precious metals demand remains positive, with the investment case to include gold in a well-balanced portfolio as strong as ever. 

Jordan Eliseo
Manager – Listed Products and Investment Research 
The Perth Mint
5 August 2020

Past performance does not guarantee future results.
The information in this article and the links provided are for general information only and should not be taken as constituting professional advice from The Perth Mint. The Perth Mint is not a financial adviser. You should consider seeking independent financial advice to check how the information in this article relates to your unique circumstances. All data, including prices, quotes, valuations and statistics included have been obtained from sources The Perth Mint deems to be reliable, but we do not guarantee their accuracy or completeness. The Perth Mint is not liable for any loss caused, whether due to negligence or otherwise, arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article. 

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Gold ends financial year at record high as investors continue to accumulate precious metals

Topics [ market analysis Market update ]

Gold ended June trading at more than USD 1,760 per ounce. Now up by 25% in the last year, the outlook is promising for a continued bull run in precious metals.  

Executive summary

Gold finished June trading at USD 1,768.10 per troy ounce, rising by 2.27% in June.
The price of gold has risen by 16.55% in US dollar terms (USD) and 18.83% in Australian dollar (AUD) terms in the first six months of 2020.
Silver prices also continued to rally, finishing the month up 2.4% in USD terms.
Demand for physical gold remains robust, though has eased from record levels seen earlier this year.
Expensive equity markets, low yields on traditional safe haven assets and the ongoing threat from COVID-19 are expected to support continued gold demand in the second half of 2020.

Full monthly review – June 2020 

The price of gold continued to rise in June, finishing the month trading at more than USD 1,760 per ounce. Matching the highest calendar quarter close on record set back in 2012, the yellow metal is now well and truly back on the investment radar after a strong rally in H1 2020 that has seen the price rise by more than 15% in USD terms. 

In AUD terms, while returns were more subdued the price closed June trading at more than AUD 2,500 per troy ounce, an increase of almost 20% in the past six months. 

Silver prices continued to rally in June, up 2.41% in USD terms, with the gold silver ratio (GSR) finishing the month at 99. Whilst this a sharp decline from where this ratio sat at the end of March when it was over 110, its worth remembering that the GSR started the year at just 85. Silver may have outperformed gold in the past three months, but it has a lot of catching up to do. 

Continued inflows into ETFs, rising inflation expectations and a minor pullback in equity markets in the last three weeks of June all contributed to the rally in precious metals, with gold finally pushing through USD 1,750 per ounce, a level that had provided some resistance earlier in the year. 

In this month’s report we look at the likely drivers of gold moving forward, as well as the latest developments in financial markets, including:

The ongoing threat from COVID-19;
Seasonality trends and why we are entering a historically strong quarter for gold prices;
Why managed money positioning in the futures market is a positive sign for precious metal bulls; and
Why soaring equity markets prove there are multiple drivers of gold demand today.

COVID-19 threat remains

The latest data from around the world indicates that the COVID-19 virus is spreading faster than ever, surpassing 10 million cases in late June. The United States and Brazil seem particularly hard hit, whilst Australia itself is not immune, with community transmission in places like Victoria now at record levels. 

The threat from COVID-19 will continue to complicate the path forward for the global economy for some time to come. It will weigh on economic output, negatively impact company earnings and force fiscal and monetary authorities to deploy larger amounts of stimulus for longer than they would like.

We’d expect to see gold continue to benefit from these trends, as it has for much of the past six months. 

Managed money positions are starting to build

Managed money positioning in the gold futures market has been relatively subdued since the COVID-19 threat emerged, with speculators positioned to benefit from a gold price increase paring back their exposure.

Indeed, between mid-February and early June, gross managed money long positions fell from 278,286 contracts to just 126,407 contracts, a decline of more than 50%. 

In the past two weeks gross managed money long positions rose to 161,593 contracts in a sign that speculators are again willing to increase their long exposure to the gold price. 

Note that as per the chart below, which shows movements in gross long positions and the USD gold price over the past 10 plus years, there is no sign of overexuberance. 

Holdings remain in line with their long-run averages, and at barely half the levels seen at some points in the past, with large increases in managed money longs typically helping push the gold price higher. 

Source: The Perth Mint, CFTC 

The fact that gold prices have performed as well as they have over the past three months without much support from this sector of the market is of itself a positive sign. 

If positioning in this space continues to build in the coming weeks, it could very easily help propel gold prices back towards all-time highs in USD.  

Equity markets remain euphoric

Despite the unprecedented slowdown in economic activity caused by COVID-19, equity markets enjoyed an enormous rally in Q2 2020, with the Dow Jones for example recording its strongest calendar quarter since 1987.

The rise in equity markets has been supported by all types of investors to a varying degree. Millennial investors in the US flocked to trading platforms like RobinHood, as well as traditional brokerage accounts offered by the likes of Charles Schwab and TD Ameritrade. Similar trends have also been seen in Australia.   

Hedge funds have also dramatically increased their allocations to the stock market in the past three months. Survey data from Bank of America Merrill Lynch suggests net exposure to stocks from these investors is near record highs, having risen from below 20% to more than 50% since April.

Institutional investors like pension funds also seem to have increased their exposure across the quarter, adding to the upside move in markets. 

The fact that gold rallied by more than 10% in USD terms alongside the huge increase in risk assets seen in Q2 aligns with historical observation which illustrates gold’s typically positive correlation to rising equity markets. It is also a positive sign as it demonstrates that investor appetite for bullion is not strictly limited to those seeking a hedge against falling equity markets, which was undoubtedly a major factor supporting demand in Q1.

Whether it be fears over higher inflation (with 10-year break even inflation rates continuing to rise in June, though they admittedly remain at low absolute levels), a desire to hedge against a potential weakening of the USD, or simply a wish to broaden the range of defensive assets within a portfolio given continued negative real yields on most government bonds, there are multiple factors supporting demand for gold and its price at present. 

Should equity markets experience a second wave of selling in the months to come, this would likely serve to act as a further catalyst for gold prices.
Seasonality a tailwind for gold in Q3

Gold is entering a seasonally positive period according to analysis of historical data which suggests third quarter returns are typically the strongest on record. This is demonstrated in the chart below, which shows the average monthly return of gold priced in USD for each calendar month. 

Source: The Perth Mint, Reuters 

Whilst historical performance patterns do not guarantee that prices will not fall in the coming quarter, the data does suggest that a continued increase in the USD gold price would not be unusual.

Jordan Eliseo
Manager Listed Products and Investment Research 
The Perth Mint
6 July 2020

Past performance does not guarantee future results.
The information in this article and the links provided are for general information only and should not be taken as constituting professional advice from The Perth Mint. The Perth Mint is not a financial adviser. You should consider seeking independent financial advice to check how the information in this article relates to your unique circumstances. All data, including prices, quotes, valuations and statistics included have been obtained from sources The Perth Mint deems to be reliable, but we do not guarantee their accuracy or completeness. The Perth Mint is not liable for any loss caused, whether due to negligence or otherwise, arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article. 

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Gold hits all-time high in Australian dollars

Topics [ gold analysis Market update ]

Executive summary

 • The Australian dollar gold price hit an all-time high in February, rising 2.76% to finish the month at AUD 2441 per troy ounce. Prices in US dollars ended the month essentially flat, after trading above USD 1,650 per troy ounce during the month.

 • Silver underperformed, down 7% in USD terms, with the Gold to Silver ratio (GSR) finishing the month above 95, the highest figure in approximately 30 years.

 • Financial markets were driven by growing fears over the spread of Coronavirus in February, which has now spread to over 50 countries worldwide.

 • Global equity markets suffered large falls as the Coronavirus crisis intensified. This included the Australian Stock Market, which in the last week of February suffered its largest weekly fall since October 2008. 

 • Precious metals were not the only safe haven assets to see increased demand, with US and Australian 10-year bond yields hitting all-time lows in February 2020.

 • Gold ETF holdings soared to all-time highs during February, whilst the value of precious metal holdings held by The Perth Mint depository exceeded AUD 5 billion, a new record.

The month in review – February 2020

February was one of the most volatile months in a decade for financial markets, with large moves seen in equities, commodities, fixed income assets and precious metals. The driver of these moves was the increasing fear that markets have about the spread of the coronavirus around the globe.

Far from being contained, large numbers of confirmed cases showed up in all parts of the world, from Korea to Italy to Iran, with the disease seemingly spreading faster outside of China than within it.

Countries stepped up their preparations to deal with any fallout from a further spread of the virus, with Australia initiating its emergency response plan, meanwhile the World Health Organisation said the outbreak had reached a “decisive point” with Coronavirus having “pandemic potential.”

Given these developments, the volatility seen in financial markets was to be expected, with precious metals benefiting from the fear gripping markets. At one point during February gold traded above USD 1,650 and AUD 2,500 per troy ounce, a new all-time high in Australian dollar terms.

The gains were not maintained however, with the metals suffering large losses on Friday 28th. Gold fell by approximately 4% on the day to end the month flat in USD terms, whilst silver fell by close to 8%, as some investors locked in the profits, whilst others were forced to liquidate their precious metal holdings to cover losses in other parts of their portfolios. 

Despite the sharp correction to close out the month, it has still been a strong start to 2020 for gold, with the yellow metal rising by 12.99% in AUD terms, and 4.54% in USD terms in the first two months of the year. Silver has now fallen by almost 7% in USD terms, with the Gold to Silver Ratio (GSR) finishing February 2020 at 95, the highest level seen in the last 20 years.

Fixed income securities found favour during February. Australian and US 10-year government bonds ended the month yielding just 0.68% and 1.15%. In percentage terms, the declines in the yields on these securities were amongst the largest on record, with both falling to all-time lows.

The news was not so positive for share markets, which suffered one of their worst months on record. According to Deutsche Bank, the 10% fall in US equities that occurred in just six trading days in late February was the fastest on record. European stocks also fell sharply, according to Commsec, whilst the last week of February saw the ASX 200 suffer its biggest weekly fall since October 2008.

Many share markets around the world have now erased all their gains seen in the first few weeks of 2020, with the ASX 200 for example now trading back at levels seen in June of last year.

ETF holdings saw record inflows

The strength in the gold price for most of February, and the deteriorating economic and financial market outlook saw a flood of investor demand, with gold ETFs seeing net inflows for 25 days straight in February. This is the longest run on record, with total holdings in global gold ETFs hitting all-time highs.

The Perth Mint saw the strength of this rising gold ETF demand first hand, with holdings in our ASX listed product Perth Mint Gold (ASX: PMGOLD) increasing by over 12% in 2020 thus far. This growth helped total client holdings of precious metals stored with The Perth Mint top AUD 5.1 billion for the first time, testament to the growing interest in precious metals from investors both in Australia and worldwide.

Precious metals outperformed commodities

Market movements in February saw the gap between precious metals and other commodities increase, with the disparity in their performance dating back to late 2018, when a correction in equity markets reignited demand for precious metals.

This is demonstrated in the chart below which plots the return for gold, silver, copper and crude oil, as well as the ASX 200, from September 2018 through to February 2020. Note that all the assets were rebased to 100 for ease of comparison.

The chart highlights the strong outperformance of gold and silver, with both rallying in Q4 2018, a period in which the ASX 200 and other commodities sold off.  This demonstrates that both gold and silver have monetary safe haven qualities, unlike most commodities, which historically sell off during periods of equity market weakness and/or heightened concerns regarding the health of the global economy.

In USD terms, from September 2018 to February 2020, gold and silver rose by 32.33% and 16.62% respectively, while copper and oil dropped by 7.05% and 36.11% respectively. The ASX 200 price index was up just 3.76% over this time period.

The outlook

The pullback in gold and silver on February 28 was in many ways a healthy development for the precious metal market. We have warned for some time that gold needed to consolidate recent gains, especially given the size of the price move that we have seen since September 2018.

No market goes up in a straight line, so it was only a matter of when, not if, a correction in precious metal prices occurred, especially as hedge funds and other short-term speculators had built up historically large long gold positions.

Whilst Friday’s pullback took some froth out of the market, caution is still warranted. If equity markets continue to sell off, then gold and silver may also decline, even if only on a short-term basis, much like they did for parts of 2008, before they embarked on a massive bull market run that culminated in 2011. 

Short-term moves aside, developments in financial markets and in the economy throughout February don’t in any way alter the long-term bullish argument for precious metals, nor the strategic case for investing in them as part of a well-diversified portfolio.

If anything, quite the opposite, for whilst the fallout from Coronavirus remains impossible to quantify, there is no doubt that it will have a negative impact on economic growth, and act as a headwind for equity markets, with Goldman Sachs now forecasting that there will be no earnings growth for S&P 500 companies as a whole.

Given the elevated price to sales and price to earnings ratios that investors are currently paying to own stocks, a period of subpar returns in share markets is impossible to ignore, even if they bounce back from the severe losses seen over the last week of February.

Added to this is the outlook for real yields in traditional defensive assets like cash and fixed income. At current inflation rates, many government bonds guarantee negative real returns to buy and hold investors, encouraging them to diversify into alternative assets, including precious metals.

Meanwhile, markets are now pricing aggressive monetary easing from central banks, with Goldman Sachs forecasting that the US Federal Reserve will cut interest rates by 1% this year, starting with a 0.5% cut this month.  In Australia, the Reserve Bank of Australia (RBA) acted in early March, to reduce interest rates to a new all-time low of just 0.5%.

Given this backdrop, it is no surprise that many banks remain bullish on gold, with Invesco recently stating that they see gold hitting USD 1,800 per troy ounce, whilst precious metals focused asset manager Spott Inc CEO Peter Grosskopf, thinks the yellow metal is on track to hit USD 2,000 per troy ounce.


Past performance does not guarantee future results.

The information in this article and the links provided are for general information only and should not be taken as constituting professional advice from The Perth Mint. The Perth Mint is not a financial adviser. You should consider seeking independent financial advice to check how the information in this article relates to your unique circumstances. All data, including prices, quotes, valuations and statistics included have been obtained from sources The Perth Mint deems to be reliable, but we do not guarantee their accuracy or completeness. The Perth Mint is not liable for any loss caused, whether due to negligence or otherwise, arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article.

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