5 Factors That Influence How Commodity Prices Impact the Value of Gold

In the interconnected global economy, different assets often have influence over one another. Gold is an example of an important historical and resilient asset that is connected and influenced by economic factors.

One such factor that plays a pivotal role in gold prices is the changing tide of commodity prices. The ups and downs in commodity prices, ranging from oil and metals to agricultural products, have a big say in what happens to gold.

Gold is often considered a commodity itself. Yet it also functions as a form of currency, investment, and a store of value. This is why it’s important for investors to know the economic elements that influence gold's value.

In this article we’ll walk through how changes in commodity prices shake up the value of gold. This affects not just markets but also the choices of where people invest their money. From dealing with inflation to the basic dynamics of supply and demand, here are the ties between gold and commodities and how they impact your investments.

1. Inflation

Gold has long been considered a hedge against inflation. Moreover, commodity prices are often sensitive to inflationary pressures. When inflation rises, the purchasing power of currencies declines. That prompts investors to seek refuge in tangible assets like gold as a safety net from inflation.

Consequently, increasing commodity prices can be indicative of inflation. This tends to drive up demand for gold, pushing its price higher. Other commodities can also be viewed similarly during inflationary periods.

Inflation erodes the purchasing power of currencies over time. As commodity prices rise, it can signal increasing production costs and, therefore, inflationary pressures. Gold, with its intrinsic value and limited supply, is often sought as a hedge against inflation. Investors turn to gold to preserve their wealth when traditional currencies face the risk of devaluation.

2. Economic/Market Sentiment

Both gold and other commodities can be influenced by broader market sentiment. Economic uncertainty or geopolitical instability may lead investors to seek safe-haven assets like gold. Similarly, commodities may see price fluctuations based on global economic conditions and demand.

Commodity prices are often viewed as a barometer for the overall health of the global economy. Fluctuations in commodity prices can be caused by:

• Economic uncertainties
• Geopolitical tensions
• Financial crises

Gold, as a safe-haven asset, tends to attract investors during times of economic uncertainty. Therefore, when commodity prices experience volatility due to external factors, it can influence investors to flock to gold as a reliable store of value.

Commodity prices are closely linked to the health of the global economy. As a result, the factors listed above can create volatility in commodity markets. Gold, being a safe-haven asset, tends to thrive in times of economic uncertainty or crisis.

Investors seek the stability and security that gold offers. This leads to increased demand and upward pressure on its price when commodity markets experience turbulence.

3. Currency Exchange Rates

Gold is traded globally, and its price is denominated in various currencies. Changes in commodity prices can impact currency exchange rates. These fluctuations, in turn, influence the price of gold.

For instance, if a major commodity-producing country experiences a surge in prices, it may strengthen its currency. Conversely, a weaker currency in the face of rising commodity prices can make gold more attractive to investors in that region. This currency-driven demand can impact the overall global demand for gold, affecting its price.

4. Interest Rates

Changes in interest rates can impact the opportunity cost of holding gold. When interest rates are high, non-interest-bearing assets like gold may be less attractive. This relationship can extend to other commodities as well. Commodity prices are sensitive to interest rates because they affect the cost of financing for producers. When interest rates rise, the cost of holding non-interest-bearing assets like gold increases.

This higher opportunity cost may lead some investors to shift towards interest-bearing assets. That potentially decreases the demand for gold and puts downward pressure on its price. By contrast, lower interest rates may make gold more attractive as the opportunity cost diminishes.

5. Supply and Demand

The prices of both gold and other commodities are influenced by supply and demand factors. Economic growth can increase demand for various commodities. Conversely, disruptions in supply can lead to price fluctuations.

Many commodities share common factors such as mining and extraction processes. Changes in commodity prices can impact the cost of production for gold mining companies. If the cost of extracting gold becomes prohibitively high due to soaring commodity prices, the supply of gold may decrease. With the principle of supply and demand at play, a decrease in the supply of gold can contribute to an increase in its price.

Central banks around the world hold significant amounts of gold. If they decide to buy or sell gold, it can have a substantial impact on the overall supply. If central banks increase their gold reserves, it can create positive sentiment and confidence in the market, likely leading to an increase in the demand for gold. This increased demand, in turn, may drive up the price of gold.

On the flip side, if central banks sell off their gold reserves, it floods the market with supply. This will possibly lead to a decrease in the value of gold. That's why it can be valuable for investors to monitor central bank activities and announcements regarding gold reserves.

Takeaway: Gold Has a Unique Relationship to Commodity Markets

In financial markets, commodity prices and gold are interconnected. With inflation hedging, supply and demand dynamics, global economic sentiment, currency exchange rates, and the influence of interest rates, it becomes clear that gold's value is a reflection of the broader economic landscape.

These elements together each play their own role in the rise and fall of gold prices. Changes between gold and other commodities shows how the slightest ripple in one market sends waves through other assets. This is helpful to know when shaping an investment portfolio to weather tough economic times.

By Gainesvillecoins

Source: Gainesvillecoins

Gold Price Forecast: XAU/USD to see a trend reversal on a decisive break above $1,950

Gold breached the resistance level of $1,910. Economists at ANZ Bank analyze the yellow metal’s technical outlook.

Buying could emerge at $1,900, limiting the downside

Gold would need to stay above $1,910 and break the next resistance level, of $1,950, to reverse the current downtrend. A breach of $1,950 would also confirm the latest ‘double bottom’ formation, which would indicate a trend reversal.

As the recent price action was triggered due Israel-Hamas war, the geopolitical premium could quickly vanish if the situation normalises.

Prices could fall back below $1,900 range. But buying could emerge at this level, limiting the downside.

By FXStreet Insights Team

Source: Fxstreet

Millennial Investors Like Gold

Last week in the State Street Global Advisors’ Gold ETF Impact Study, the firm reported that “Among approximately 1,000 investors surveyed, Millennials have the biggest allocation to gold at 17%, with Baby Boomers and Gen X investors lagging behind at just 10%.” The report also highlighted that millennials are more positive toward this asset class when compared to the other generations.

The study supported this by asking investors from the three generations about their thoughts on several different gold ETF topics. The results showed that a majority of millennials believe that gold ETFs are the best way to invest in gold. Specifically, 69% of millennials agreed compared to 55% of baby boomers and 35% of Gen Xers. On top of that, the report also showed that “Survey participants who hold gold ETFs are more likely to be Millennials.” Ultimately, the study revealed that millennials have a significant amount of admiration for ETFs that give exposure to gold.

Although State Street’s SPDR ETF family only offers physical gold ETFs, there are multiple ways investors can gain access to this asset class through an ETF wrapper, including via gold mining equities. VanEck offers a pair of ETFs that respectively provide exposure to large-cap and small-cap gold miners.

Gold Mining ETFs

The VanEck Gold Miners ETF (GDX) has an expense ratio of 0.51% and nearly $12 billion in assets under management. This fund offers exposure to some of the largest gold mining companies globally in the market within its holdings. The ETF tracks the NYSE Arca Gold Miners Index. In the U.S., the fund holds top companies like Newmont Corp., Barrick Gold Corp., and Franco-Nevada Corp. GDX also offers exposure to gold mining companies based in Australia, Hong Kong, and South Africa, among other locations.

VanEck also offers the VanEck Junior Gold Miners ETF (GDXJ), which tracks the small-cap MVIS Global Junior Gold Miners Index. It has an expense ratio of 0.52% and an AUM of nearly $4 billion. The fund offers exposure to some of the top small-cap mining companies in the market that mine gold or silver. Domestically it offers exposure to companies like Pan American Silver Corp., Kinross Gold Corp., and Alamos Gold Inc. Much like GDX, it also offers exposure to several foreign mining companies based in countries like Australia, Canada, and the U.K.

Gold Mining ETF Performance

Both GDX and GDXJ rank among the lowest-cost gold miner ETFs, according to ETFDB.com. GDX posted an annualized five-year return of 8.90%, while GDXJ returned 4.26%. However, during the past 12 months, GDX was up 24.39% and GDXJ increased by 22.58%.

At the end of the day, there are several different ways that millennial investors can gain access to this asset class. Investing in funds that can give global exposure to large-cap and small-cap gold miners like GDX and GDXJ is one way investors can do so. 

By DNICK PECK

Source: VettaFi

Robust equities erode gold's safe-haven allure as ETF holdings fall

• Global gold ETF holdings fall to lowest since April 2020
• 
  Receding recession risks' lower need to shift into gold
• Bullion loses investors to outperforming equities, bonds

Receding fears of a U.S. slowdown, surging bond yields and the robust performance of equities have gradually eroded the appeal of exchange-traded funds (ETF) backed by traditional safe-haven gold this year, despite sticky inflation.

Overall holdings in over 100 gold ETFs tracked by the World Gold Council (WGC) fell to 3,348 metric tons as of Aug. 18, at their lowest level since 3,330 tons in April 2020.

The biggest ETF, SPDR Gold Trust, saw holdings dwindle to pre-pandemic levels.

Investors typically buy gold during times of financial and economic uncertainty and rising inflation. This was seen in May when gold rallied to near-record highs during the U.S. regional banking crisis.

Since then, prices have dropped roughly 9% to five-month lows around $1,890 per ounce.

"Gold has fallen into disfavour as a hedge against economic uncertainty for many institutional investors," said Ross Norman, chief executive of Metals Daily.

Recent U.S. economic data has created uncertainty about further rate hikes from the U.S. Federal Reserve and raised some hope for a "soft landing" for the U.S. economy.

"The economy is sound, especially in the U.S., and risks of a recession have already receded. Hence, there's no imminent need to shift into gold at the moment," said Carsten Menke, Head of Next Generation Research, Julius Baer.

Equities have outperformed gold despite higher interest rates, while rival safe-haven Treasury bonds have attracted investors away from gold, which doesn't earn any interest or dividends.

Gold has returned 3.5% so far this year, less than the 13.8% from the S&P 500 and the 11% from benchmark 10-year U.S. bond yields.

However, "while some investors have come out of the ETF space, there's still a positive view of gold as an asset diversifier," said Philip Newman, managing director of Metals Focus.

By Deep Kaushik Vakil

Source: Yahoo

M Stanley Foresees Gold Price to Hike to US$2,100 in 1Q24

Morgan Stanley's US economists anticipated that the US Federal Reserve will introduce the first rate cut in March 2024, and forecast the gold price to elevate to USD2,100 per ounce in the first quarter of 2024, from the current level of USD1,900 per ounce, the broker stated in a recent report.

Under the environment of rising gold prices, Morgan Stanley selected ZHAOJIN MINING (01818.HK)  +0.100 (+0.871%)    Short selling $4.26M; Ratio 6.617%   as the top pick, with its H-share target price added from $12.5 to $12.9, with an Equalweight rating. SD GOLD (01787.HK)  -0.120 (-0.752%)    Short selling $477.05K; Ratio 4.631%   was also rated at Equalweight, with its H-share target price raised from $16.1 to $16.6.

By Aastocks

Source: Aastocks_com

The evolving picture of global gold production

The significant lag in the detailed data is due to the length of time it takes for various large-scale mining (LSM) data points to be published and collated. Our figures - supplied by Metals Focus - also include estimates for artisanal and small-scale mining (AGSM). Challenges in compiling accurate estimates for this portion of global gold production also contribute to the delay.

According to Metals Focus' latest estimate, global gold production in 2022 was 3,628t.1  This is 1% higher y/y, and commentary on this can be found in our Full Year 2022 Gold Demand Trends report.

The latest country-level data shows no change amongst the five largest gold producing nations compared to 2021. China remains the world's largest gold producer, followed by Russia, Australia, the United States and Ghana. However, extending the analysis to the top 20 gold producers, things look very different compared to 2010. West African nations – such as Ghana, Mali and Burkino Faso –have grown in importance, with several now firmly within the top 20 nations. Also of note is Bolivia, which has seen a tremendous growth in ASGM over the last decade, while South Africa has continued its steady decline.

On a longer-term basis, we see that global gold mine production remains geographically diverse, both at a country and regional level. For example, China accounts for 10% of global production, just below the ten-year average. And global production is also spread across regions, with Africa accounting for the largest share at 27% in 2022. This serves as a reminder that gold benefits from its supply profile, which provides stability to the market by reducing the likelihood of a supply shock.

By Krishan Gopaul

Source: World Gold Council

Cut Stocks, Buy Gold, Hold Your Cash

A debt-ceiling negotiation that remains in limbo, elevated recession risks and a hawkish Federal Reserve stance are just a few of the reasons JPMorgan Chase & Co.’s Marko Kolanovic is advising clients to further dump equities and hold onto cash.

A team of JPMorgan strategists led by Kolanovic trimmed its allocation to stocks and corporate bonds while boosting its stake in cash by 2%. Within the commodities portfolio, the firm also rotated out of energy and into gold on haven demand and as a debt-ceiling hedge — another move intended to strengthen the JPMorgan’s defensive posture.

“Hopes of a swift resolution to the US debt ceiling have somewhat bolstered market sentiment,” Kolanovic wrote in a note to clients. “Despite last week’s rebound, risk assets are failing to break out of this year’s ranges and if anything credit and commodities are trading at the lower end of this year’s ranges. With equities trading close to this year’s highs, our model portfolio produced another loss last month, the third loss in four months.”

US stocks treaded water Tuesday as investors awaited answers from Washington on what the federal government will do to avert a catastrophic default. President Joe Biden and Republican House Speaker Kevin McCarthy held what both politicians called a “productive discussion” Monday evening but did not settle on a deal.

Kolanovic was one of Wall Street’s biggest bulls across much of the market rout in 2022, but has since U-turned on a deteriorating economic outlook this year, cutting the bank’s model equity allocation in mid-December, January, March — and now May.

More broadly, Kolanovic and his team said equities appear disconnected from bond markets and softening economic data, in addition to debt-ceiling risks.

By Bloomberg

Source: Yahoo Finance's

What strong gold says about the weak dollar

Today commentators overwhelmingly agree that a weakening US dollar cannot possibly lose its status as the world’s dominant currency because there is “no alternative” on the visible horizon. Perhaps, but don’t tell that to the many countries racing to find an alternative, and such complacency will only accelerate their search.

The prime example right now is gold, up 20 per cent in six months. Surging demand is not led by the usual suspects — investors large and small, seeking a hedge against inflation and low real interest rates. Instead, the heavy buyers are central banks, which are sharply reducing their dollar holdings and seeking a safe alternative. Central banks are buying more tons of gold now than at any time since data begins in 1950 and currently account for a record 33 per cent of monthly global demand for gold.

This buying boom has helped push the price of gold to near-record levels and more than 50 per cent higher than what models based on real interest rates would suggest. Clearly, something new is driving gold prices.

Look closer at the central bank buyers, and nine of the top 10 are in the developing world, including Russia, India and China. Not coincidentally, these three countries are in talks with Brazil and South Africa about creating a new currency to challenge the dollar. Their immediate goal: to trade with one another directly, in their own coin. “Every night I ask myself why all countries have to base their trade on the dollar,” Brazilian president Luiz Inacio Lula da Silva said recently on a visit to China, arguing that an alternative would help “balance world geopolitics”. 

Thus the oldest and most traditional of assets, gold, is now a vehicle of central bank revolt against the dollar. Often in the past both the dollar and gold have been seen as havens, but now gold is seen as much safer. During the short banking crisis in March, gold kept rising while the dollar drifted down. The difference in the movement of the two has never been so large.

And why are emerging nations rebelling now, when global trade has been based on the dollar since the end of the second world war? Because the US and its allies have increasingly turned to financial sanctions as a weapon.

Astonishingly, 30 per cent of all countries now face sanctions from the US, the EU, Japan and the UK — up from 10 per cent in the early 90s. Until recently, most of the targets were small. Then this group launched an all-out sanctions attack on Russia for its invasion of Ukraine, cutting off Russian banks from the dollar-based global payment system. Suddenly, it was clear that any nation could be a target.

Too confident in the indomitable dollar, the US saw sanctions as a cost-free way to fight Russia without risking troops. But it is paying the price in lost currency allegiances. Nations cutting deals to trade without the dollar now include old US allies such as the Philippines and Thailand.

The number of countries with central banks looking at ways to launch their own digital currency has tripled since 2020 to more than 110, representing 95 per cent of the world’s gross domestic product. Many are testing these digital currencies for use in bilateral trade — another open challenge to the dollar.

Though some doubt a dominant dollar matters for the US economy, high demand for the currency in general tends to lower the cost of borrowing abroad, a privilege America sorely needs today. Among the top 20 developed economies, it now has the second highest fiscal and current account deficits after the UK and the second highest foreign liabilities (as reflected in its net international investment position) after Portugal.

The risk for America is that its overconfidence grows, fed by the “no alternative” story. That narrative rests on global trust in US institutions and rule of law, but this is exactly what weaponising the dollar has done so much to undermine. It rests also on trust in the country’s ability to pay its debts, but that is also slipping, as its reliance on foreign funding keeps growing. The last line of defence for the dollar is the state of China, which is the only economy sufficiently large and centralised to challenge US currency supremacy — but even more deeply indebted and institutionally dysfunctional.

When a giant comes to rely on the weakness of rivals, it’s time to look hard in the mirror. When it faces challenges from a “barbaric relic” such as gold and new contenders like digital currency, it should be looking for ways to strengthen trust in its finances, not taking its financial superpower status for granted.

By Businesstelegraph

Source: Businesstelegraph

Commodity prices forecast to be strong in 2023

 

The StoneX Metals and Energy Markets Annual Outlook forecasts double digit percentage increases for seven out of twelve commodities tracked.

The StoneX Metals and Energy Markets Annual Outlook forecasts double digit percentage increases for seven out of twelve commodities tracked.

Last year’s big winners included Zinc (17% price increase), Aluminium (up 16%), and Copper (up 15%) – which our team’s forecasts suggest might continue to be the case – while Platinum is projected to see a turnaround.

Last year, the big losers were Nickel (down -44%), Platinum (-12%) and Oil (-11%). It’s interesting to note that overall, commodities lagged equity returns, with the S&P Composite index up 19%.

Uncertainty on the interest rate path, reflecting inflation concerns, weigh on the outlook for economic growth and so the industrial demand for commodities.

Mid-December US GDP growth moderated in Q4 2022, and recent monthly data has been far less encouraging. Europe faces the same inflation headwinds plus the impact of the Russia-Ukraine conflict. However, consumer and manufacturing sentiment, and the labour market, have all been resilient. That might change if the Fed raises interest rates more aggressively, as markets now project.

China, the swing player in economic growth and commodity demand, despite its post-Covid lock down rebound, could still see subdued growth rates in its historical context.

Commodity review

Natural gas: Our year-end price forecast of €110/MWh accounts for the additional seasonal pressure we envisage next winter due to depletion rate concerns. We believe this winter’s mild beginnings may depress prices throughout 2023 on a year-by-year basis, as Europe already looks considerably better placed to survive the next cold season. Significantly reduced supply-side vulnerability might reduce volatility until the autumn, when weather conditions may contain substantial upside price risk as we approach 2024.

Copper: The recovery in the copper price could be prolonged well into 2024. On the demand side, we forecast that copper may encounter a year of moderate demand in 2023, rising by 2.4%, with growth led by China and Asia, while western demand might be constrained by potential recessions. On a global scale, copper’s use in green technologies could continue to outpace other end uses.

Platinum: The demand looks bright as the global vehicle industry recovers, as over 40% of platinum demand is in automotive exhaust emissions control, including diesel vehicles. The European Commission’s proposal for aligning diesel and gasoline vehicle emissions favour platinum. In addition, the effective life of the catalysts is to be doubled – although the technology here may mean retooling rather than raising loadings. Add to this the continued substitution of platinum for palladium in the sector, and platinum might well be the best performing precious metal this year.

Aluminium: Risks to the supply side could arise from the implementation of US sanctions on Russian material, which accounts for 6% of global aluminium supply. Moreover, the growing move towards natural resource protectionism in countries like Indonesia could result in increased export tariffs for key materials.

Gold: Gold is reasserting its role as a risk hedge and attracting investment activity in the face of geopolitical risk, some bearish dollar views and continued economic uncertainty, while views are also mixed over the equity markets’ prospects. Overall, tailwinds outweigh headwinds, and we are expecting a test of then $2,100 gold price before year-end – unless the Fed turns more hawkish on rates, which would be bearish for gold.

Silver: We expect silver to outperform a bullish gold market, but with its usual volatility, and the overall trend might be only marginally higher than that of gold. The beta is normally 2.0-2.5 to the gold price, but we are expecting nothing like that level this year. We are looking for a silver price average of $25.30 this year, a gain of 14% over last year’s ending value of $23.95.

Palladium: While there could be a recovery this year as the auto sector, typically 82% of demand, comes back to life with the easing in the microchip supply chain and the re-opening of China, and relatively low dealer inventories in North America, palladium would be likely to run behind the underlying auto numbers as it competes with the substitution threat from platinum, which is now entrenched. For the longer term, the electrification of the fleet and the ban on new ICE vehicles from 2035 onwards in a few regions will take its toll on the palladium market.

Tin: We forecast tin demand from construction and industrial sectors to remain muted, with China taking the lead as it reopens. Our outlook for supply in 2023 however, is brighter, with refined output is expected to return to growth, rising by 2% year-on-year, as improving supply chains provide easier shipments of material from the West to East.

Lead: We forecast 2023 to mark a universal production rebound for refined lead for both primary and secondary supply, with the fees paid to smelters by mines for converting copper concentrate to copper cathode (known as TC/RCs) set to remain elevated on plentiful material, although energy prices with be pivotal to smelter profitability.

Oil: We think the year might end in a supply surplus that should could onsequently ease the inventory pressure that we expect to build from March. Our year-end price forecast of $85 does not mean we think the road ahead should be entirely smooth. Indeed, upside risk factors ranging from the dollar to resurgent Asian demand could push prices above $95 in Q2 2023, threatening another bout of non-core inflationary pressure across much of the globe.

Nickel: The fundamental picture for nickel is turning less supportive, with a forecast second (and increasing) year of surpluses, driven by ongoing capacity expansions within Indonesia for both Nickel pig iron (NPI) and ex-NPI production, solidifying Indonesia as the world’s largest nickel producing country for a third year.

By PAUL WALTON

Source: FOREX*COM

Gold investors still MIA

Gold’s sharp selloff this month has been driven by a confluence of factors. Entering February short-term overbought, a couple surprise events ignited big gold-futures selling. Then the US futures regulator failed to report speculators’ positioning, breaking the feedback mechanism limiting excessive selling. But the main reason those futures guys have been able to run amok is gold investors are still missing in action.

Major gold uplegs are fueled by three sequential stages, with the first two igniting the subsequent two. Uplegs are born in deep lows as speculators rush to buy to cover gold-futures short contracts. That burns out fast, lasting a couple months at best. But that legally-required buying forces gold high enough for long enough to attract back other long-side gold-futures speculators. Their voluntary buying is much larger.

On average over the past year, total spec longs have exceeded total spec shorts by 2.4x. Thus they are proportionally more important for fueling major gold uplegs. Stage-one gold-futures short covering soon gives way to stage-two gold-futures long buying, which can run three to six months. That drives gold higher still, eventually attracting back investors with their vast pools of capital dwarfing gold-futures specs’.

Those early-gold-upleg dynamics were working normally into early February. Gold had powered 20.2% higher over 4.2 months since late September, formally entering a bull market. Between late September to early December, stage-one gold-futures short covering drove big initial 8.8% gold gains! Specs bought to cover 66.2k gold-futures short contracts during that span, the equivalent of 205.8 metric tons of gold.

Spec long buying was all but nonexistent then, totaling only 1.8k contracts. That stage-two buying started ramping up in mid-December, propelling gold another 9.3% higher into late January. Specs added 51.9k gold-futures longs during that early stage-two buying, the equivalent of 161.5t of gold. But their short-covering buying petered out then, shorts actually grew 1.5k contracts. Gold’s upleg was advancing like usual.

Eventually all that stage-one gold-futures short covering and stage-two gold-futures long buying drives gold high enough for long enough to ignite far-bigger stage-three investment buying. That lags major gold bottomings, because investors love chasing upside momentum and wait until uplegs are well-established before piling in. While getting closer, that essential stage-three ignition hasn’t happened yet in today’s upleg.

Heading into gold’s latest interim high on February 1st, stage-two gold-futures long buying was ramping up nicely. But gold was getting short-term overbought, stretched 1.096x above its key 200-day moving average. That remained well below upleg-slaying levels of exuberance exceeding 1.16x, but a healthy pullback to rebalance sentiment was increasingly likely. A violent one erupted on February 2nd and 3rd.

A couple weeks ago I wrote a whole essay analyzing gold’s sharp pullback, but in a nutshell two events triggered it. On the first day where gold dropped 2.0%, the European Central Bank’s latest monetary-policy decision implied one more rate hike then a pause. That unexpected dovishness hit the euro, which unleashed a parallel US dollar rally. Gold-futures speculators watch the dollar closely and do the opposite.

On the second day gold plunged another 2.4% after the latest US monthly jobs report. A record seasonal adjustment exceeding 3m jobs transformed terrible raw data into a statistically-impossible eight-standard-deviation upside surprise! Despite being fabricated, that headline jobs number implied the US economy was overheating which was very Fed-hawkish for more rate hikes. So more gold-futures selling erupted.

Despite plunging 4.4% from $1,951 to $1,866 in only two days, gold’s upleg still looked great technically after that violent pullback. Gold remained well above its $1,840 50dma, which are the strongest support zones in ongoing bull-market uplegs. Gold indeed stabilized and drifted sideways over the subsequent week, with that big gold-futures selling mostly spent. That sharp pullback had quickly eradicated greed.

Gold probably wouldn’t have drifted much lower if not for an exceedingly-anomalous event overlaying all of this. Gold-futures specs’ capital firepower is very limited, but they run extreme leverage around 25x. Way up there, a mere 4% gold move against their bets will wipe out 100% of their capital risked! And at 25x, every dollar they deploy in gold futures has 25x the price impact on gold as a dollar invested outright!

So these guys’ hyper-leveraged trading utterly dominates short-term gold price action. Since they can’t afford to be wrong for long, they have to closely follow weekly reports detailing their collective positioning as a herd. This essential Commitments of Traders data alerts the gold-futures specs when their bets are getting too lopsided to be sustainable. That naturally moderates and reverses excessive buying or selling!

Unbelievably on January 31st these CoTs went dark. The Commodity Futures Trading Commission that regulates US futures trading and collates positioning data stopped releasing CoTs due to a ransomware cyberattack on a major futures-clearing and data firm. This week is now the fourth in a row without any CoT data, which is shocking. The CFTC has issued press releases saying it hasn’t received the data yet!

I wrote another whole essay last week analyzing this troubling CoT-report outage. Without CoTs, these leveraged gold-futures speculators have no idea how much selling they have collectively done. Normally that crucial data naturally checks their selling, warning them to slow their shorting and long dumping when their overall downside bets grow unsustainably excessive. But they have been flying blind since January 24th!

After stabilizing for a week following that sharp early-February pullback, gold started drifting lower during the last couple weeks. While that was comparatively moderate, gold’s slump under its 50dma may not have happened had that CoT data been published normally. With that essential feedback mechanism for the gold-futures specs broken, the magnitude of their herd selling has been cloaked enabling it to grow bigger.

Before all this craziness, neither specs’ stage-one short covering nor stage-two long buying was done yet. Secular support for total spec shorts is running near 112k contracts, another 9k below the last-reported levels in late January. And secular resistance for total spec longs is way up near 413k contracts, a huge 112k higher than late-January levels! That implies another 26.9t and 347.8t of gold-equivalent buying coming!

Considered another way, it is useful to look at total spec shorts and longs as percentages up into their past-year trading ranges. As of that last January 24th CoT, total spec shorts were running 32% up into their range and total spec longs were 33% up into their own. That implies about a third of stage-one short-covering buying remained, and two-thirds of the more-important 2.4x-larger stage-two long buying!

So gold’s upleg was still young in early February, far from fully running its course. The majority of gold-futures buying was still coming, and the vast stage-three investment buying hadn’t even started yet! The best-available data on global gold investment demand is low-resolution, only released once a quarter by the World Gold Council in its excellent Gold Demand Trends reports. That’s too infrequent to time gold uplegs.

Thankfully some high-resolution daily data often accounts for the majority and sometimes all of quarterly global gold investment demand changes. That’s the combined bullion holdings of the mighty American GLD SPDR Gold Shares and IAU iShares Gold Trust gold ETFs. According to the WGC’s latest Q4’22 GDT, together GLD and IAU commanded 39.3% of all the gold held by all the world’s physically-backed ETFs!

A UK gold ETF in third place only weighed in at 7.3%. In Q3’22 and Q4’22, the quarterly changes in GLD+IAU holdings alone were responsible for 106% and 90% of the overall changes in total global gold investment demand per the WGC! These ETFs act as conduits for the vast pools of American stock-market capital to slosh into and out of gold. When that is happening, it dominates gold capital flows and pricing.

This chart superimposes GLD+IAU holdings over gold and its key technicals during the last several years or so. When GLD+IAU holdings are rising, stock-market capital is flowing into gold. These ETF shares are being bid up faster than gold, forcing these ETFs to issue more shares to prevent their prices from decoupling from gold to the upside. The proceeds from those share sales are then plowed into more gold bullion.

Strategically note that major gold uplegs are fueled by huge stage-three investment buying as evident in GLD+IAU holdings. A couple massive 42.7% and 40.0% gold uplegs peaked during 2020, which saw these mighty American gold ETFs’ holdings soar 30.4% or 314.2t and 35.3% or 460.5t! And the major corrections between uplegs are driven by differential GLD+IAU-share selling, as seen during mid-2022.

Gold plunged 20.9% in 6.6 months, partially driven by a 9.0% or 140.9t GLD+IAU-holdings draw. Huge gold-futures selling played a bigger role, as speculators aggressively short sold and dumped longs on the most-extreme Fed tightening cycle ever. Resulting giant yield differentials catapulted the US dollar parabolic, its benchmark US Dollar Index skyrocketing 16.7% in 6.0 months to an extreme 20.4-year secular peak!

So specs fled gold futures with reckless abandon, crushing gold. But their capital firepower available for selling is very finite, and once it exhausted gold V-bounced into today’s strong young upleg. The Fed’s extreme dollar-gold anomaly was starting to unwind. Gold was again initially driven higher by stage-one gold-futures short-covering buying, then the baton was taken by other specs doing stage-two long buying.

While that drove gold a strong 20.2% higher in 4.2 months into early February, the majority still had yet to be done. And that gold-futures buying apparently hadn’t forced gold high enough for long enough to start enticing back investors. They love chasing upside momentum and had started nibbling, but that was it. As this chart shows, those GLD+IAU holdings have barely budged as gold shot higher in recent months!

Again investors aren’t leveraged so they don’t have to closely watch gold. It takes some time after major bottomings before they realize decisive sustainable uptrends are forming. So the troughs in GLD+IAU holdings and global investment demand occur after futures-driven terminal gold lows. While the last one came at $1,623 in late September, GLD+IAU holdings would fall another 5.3% or 75.5t lower into early December.

They finally bottomed at just 1,354.5 metric tons, a deep 2.7-year low not seen since just emerging from March 2020’s brutal pandemic-lockdown stock panic! American stock investors had virtually no portfolio exposure to gold. That day GLD+IAU holdings were worth $77.0b, merely 0.2% of the total $34,588.8b market capitalization of all 500 American stocks in the flagship S&P 500 index! Gold had been left for dead.

And despite it powering over 20% higher in recent months, investors are still missing in action per this GLD+IAU-holdings proxy for global investment demand. At best in early February the day after gold’s $1,951 interim high, GLD+IAU holdings climbed to 1,373.4t. That makes for a trivial 1.4% or 18.9t build at best, which is nothing. Gold’s stage-three investment buying hasn’t even started yet, which is super-bullish.

Make no mistake, it is still coming! We are suffering in the worst inflation super-spike since the 1970s, thanks to the Fed’s extreme money printing in recent years. In just 25.5 months into mid-April 2022, this central bank recklessly ballooned its balance sheet an absurd 115.6% or $4,806.9b! Effectively the monetary base underlying the entire global US dollar supply, that more than doubled in just a couple years.

And even though the Fed has started reversing some of those epic bond monetizations, its balance sheet is still 101.6% higher than just before March 2020’s stock panic! Inflation is simply relatively-more money competing for and bidding up the prices on relatively-less goods and services. Regardless of how much the Fed hikes rates, inflation is going to continue raging until prices soar to reflect a doubled money supply.

Inflation ravages stock markets, eroding corporate earnings as companies can’t fully pass along their own higher input costs to customers without seriously damaging revenues. Indeed the S&P 500 plunged 25.4% from early January to mid-October last year, formally entering a new bear market! Its mauling isn’t done yet despite the recent strong bear-market rally, as stock-market valuations remain dangerously high.

Entering February, those elite S&P 500 stocks still averaged 28.3x trailing-twelve-month price-to-earnings ratios. That’s still in bubble territory over 28x! Bears don’t tend to hibernate until they smash valuations back down to and often well under the 14x fair value over the past century-and-a-half. So more big stock-market losses are coming, making gold way more appealing for prudently diversifying stock-heavy portfolios.

Gold skyrocketed during the last two inflation super-spikes in the 1970s. In monthly-average-price terms from trough to peak CPI-reported inflation, gold soared 196.6% over 30 months during the first before another 322.4% moonshot over 40 months during the second! After nearly tripling then more than quadrupling during those last inflation super-spikes, gold ought to at least double during today’s latest one.

At some point American stock investors will figure all this out. They’ll get tired of the mounting losses in stocks as this bear’s predations continue, and they’ll realize raging inflation isn’t being vanquished by extreme Fed rate hikes. They’ll see gold powering higher, and realize they are woefully underinvested in this ultimate portfolio diversifier. Then they will flood into GLD and IAU shares, and gold will be off to the races.

So this young gold upleg’s stage-three investment buying is still coming. The rest of the stage-one gold-futures short covering and stage-two gold-futures long buying might be necessary to bring back investors. They will start chasing gold again once its powers high enough for long enough to fuel sufficient upside momentum to get it back on their radars. That will probably begin fairly soon, likely in the next couple months.

Sooner or later those hyper-leveraged speculators will exhaust their capital firepower available for selling. That could rapidly reverse into buying anytime on some downside surprise in major economic data, such as jobs or inflation, that is Fed-dovish. The bouncing US dollar would sell off sharply on that, igniting big gold-futures buying. Fed officials will start talking more dovish too as the bear-market losses in stocks mount.

The CFTC is finally starting to restore those crucial CoTs as well, beginning with back data this week. It is now forecasting being fully caught up and resuming normal weekly publishing by late March. So even if there’s no big Fed-dovish data, the gold-futures specs are soon facing a reckoning revealing just how much collective selling they’ve recently done. Restoring that feedback mechanism should limit further selling.

The more gold-futures selling speculators have done in recent weeks, the less they have left to do. Their finite capital firepower available for selling is exhausting! Uncloaking their collective trading may prove a shock, as these guys realize their likely selling has run its course so they rush to buy. That could catapult both gold and its miners’ stocks sharply higher, ending this anomalous selloff exacerbated by no CoT data.

Like usual the biggest beneficiaries of a sharp gold reversal higher will be the gold stocks. They were hit far harder than they should’ve been in recent weeks as gold’s anomalous plunge gutted bullish sector sentiment. Thus they are poised to roar back up in a V-bounce mean reversion as gold’s selloff ends. So this outsized gold plunge is a great mid-upleg opportunity to buy into gold stocks at relatively-low prices!

The bottom line is gold investors are still missing in action. Their massive stage-three buying hasn’t even started yet, according to the best proxy for global gold investment demand. Gold’s young upleg blasted 20%+ higher into early February on gold-futures speculators covering shorts and starting to buy longs. With the majority of that stage-one and stage-two buying remaining, gold’s upleg is still alive and well.

While gold’s recent pullback started violently, mid-upleg selloffs are perfectly normal. They are essential periodically to rebalance sentiment which keeps uplegs healthy, extending their gains. Spec gold-futures buying will return soon, eventually driving gold high enough for long enough to start attracting back investors. They love chasing upside momentum, which their big buying accelerates fueling virtuous circles.

By Adam Hamilton

Source: MINING*COM

What could a US recession mean for gold and gold equities?

We look at how gold and gold equities have fared historically during US recessions.

Financial markets have been anticipating a US recession for some time. One clear signal is the inverted US yield curve, meaning that long-term interest rates are below short-term ones. That is typically a signal that recession is coming sooner or later. The very weak US ISM services data released a couple of weeks ago suggest a recession could be coming pretty soon.

Investors will therefore be considering their allocations to different asset classes. While the past is not always a reliable guide to the future, we thought it would be useful to take a look at how both gold and gold equities have performed during previous periods of US recession.

We also consider the operational prospects for the sector, and how investors are positioned currently in terms of allocations to gold.

How have gold and gold equities performed in previous US recessions?

The table below shows returns of gold and gold equities over the last seven US recessions going back to 1973. The recessionary periods have been defined using the National Bureau of Economic Research (NBER) recession index.

Charts for gold performance and positioning

While cause and effect can always be debated, the overall conclusions are pretty clear. Gold tends to do well in absolute and relative terms during US recessions; gold equities have done even better.

Looking at the returns from six months prior to the start of the recession to six months after the end of the recession, we can see that gold has returned 28% on average and outperformed the S&P 500 by 37%. Gold equities have beaten this and generated returns of 61% on average, outperforming the S&P 500 by 69%. (Given the variation in the length of the recessions studied, six months before and after was chosen as the most optimal timeframe).

Every cycle is different and clearly the US economic cycle is far from the only factor influencing the gold market. One observation we would make is that when the policy responses to US have been particularly loose / accommodative, the gold price performance has been most explosive. This was the case in 1973 (when Arthur Burns was Federal Reserve governor) and was also the case in 2008 and 2020.

We think policy responses to future US recessions will also be highly accommodative and involve a return to combined fiscal / monetary support. This is because extremely high aggregate debt levels and large deficits mean the risk of a recession morphing into something much worse will remain far too high for policymakers to risk.

What about the poor returns in 1981 and 1990?

1981: This was the “Volcker recession” ushered in by huge interest rate rises specifically aimed at crushing inflation regardless of economic impact (arguably the 1980 and 1981 recessions should be combined as Volcker was in position from 1979).

The “easy-money” high inflation period of the late 1960s/70s had seen gold prices move from US$35/oz in 1972 to over US$800/oz in very early 1980. This occurred as dollar credibility tanked following President Nixon’s decision to suspend the direct international convertibility of the US dollar to gold, bringing an end to exchange rate stability (this was known as “closing the gold window”).

What this meant going into the 1980s was that the base for both gold bullion and gold equities was incredibly high. The epoch-changing nature of Fed Chairman Paul Volcker’s aggressive use of monetary policy was the start of a protracted bear market for gold.

Again, one of the reasons we are structurally positive on gold is that, given extremely high sovereign debt levels and large deficits, we believe any repeat of a Volcker-style intervention would quite likely lead to systemic financial collapse.

1990: This was a mild recession that followed Iraq’s invasion of Kuwait. What is striking to us from a gold market perspective is that this was the beginning of a period of aggressive central bank gold sales which lasted throughout the 1990s/early 2000s. Again, the contrast to today is very striking, with central bank gold demand running at record levels and set to remain strong.

Two more reasons to be positive on gold equities

Aside from the typically strong performance during recessions, we would also highlight two other reasons for taking a positive view on gold and gold equities.

Firstly, the overall operating environment for gold equities looks to be improving into 2023. Certainly, it is unlikely to be as difficult as in 2022.

Last year, gold producer profit margins were squeezed between rising costs (oil, steel, labour) and falling gold prices. This led to gold producer equities underperforming bullion (at least in US dollar terms).

We could see margins re-expand this year with stronger gold prices. On the cost side, some areas are seeing outright falls already. In “stickier” areas like labour we expect some slowdown in cost rises after what have been strong increases since the pandemic, particularly in North America and Australia.

Secondly, gold producer equities remain at cheap levels on a long-term view and investors are still extremely under-positioned.

Two recent charts from Scotia, a Canadian broker, make that point very clearly. The first chart below shows investors currently carry a close to zero weight in gold equities (see the red dot). Meanwhile, the weight of gold equities in the S&P/TSX Composite Index (Canada’s benchmark equity index) remains low relative to history. Resource-rich Canada has a number of listed gold producers, which is why their weight in this index provides a useful guide to investor appetite for gold equities.

Charts for gold performance and positioning

And the second chart, below, shows how overall sector valuations remain around one-third below the levels reached in the 2009-2012 period. The chart uses EV/EBITDA multiples, comparing the total value of the companies’ operations (EV) to a measure of profitability (EBITDA, or earnings before interest, tax, depreciation and amortisation).

This chart demonstrates how there is nothing currently built in to equity valuations for a higher for longer gold price environment.

By James Luke

Source: Schroders

Robust Gold Yields in the Cards

After over a decade scraping the bottom, 12-month gold lease rates have moved distinctively higher to trend above 50 bps, as US monetary policy started to tighten aggressively.

With the Fed continuing to take rates higher in the face of sky-high inflation, real interest rates will continue to rise at an accelerated rate across much of the short end of the Treasury curve. With that, speculative long activity will wane amid higher carry and rising opportunity costs. This implies that gold yields should reach multi-decade highs into 2023.

The widespread view that gold does not offer a yield is a misconception. While income generation from gold is generally not available to most private investors, central banks can actively manage their holdings to deliver returns. This can happen in two major ways: (a) bullion reserves can be lent out to earn the gold deposit rate, or (b) the metal can be swapped for dollars at the gold offered forward rate (GOFO) or the swap rate.

While central banks are also likely to capitalise on the higher gold yield environment by making gold available to the market, they are unlikely to reduce holdings. Gold reserves offer the benefit of being highly liquid holdings, which possess both pro and counter cyclical properties, are a well-recognised store of value for many millennia and are considered strategic assets which are no one’s liability. Physical holdings are also impervious to sanctions.

Gold Interest Rate Mechanics

Central banks can generate material yield from gold holdings via uncollateralised loans to a bullion bank. Given that the yellow metal is a monetary asset for central banks, it can be lent out on a term deposit like any other currency in their reserve portfolio. Most commonly, a central bank will place gold on deposit with a bullion bank, in return for a deposit rate. Maturities can vary, but 1-month, 3-month and 12-month tenures are the most common. At maturity, the gold is returned with the interest paid either in gold or fiat.

Deposit rates are derived and set independently by bullion banks. Due to gold’s inherently lower risk (eg. no one’s liability), the yellow metal tends to deliver lower returns than corporate or even government bonds.

Yield from their gold holdings can also be generated via a gold swap, or more specifically, a repurchase agreement that simulates a swap. In this instance, a central bank sells its gold to a bullion bank with the promise to buy back the gold at a later date. The central bank pays interest equivalent to the GOFO rate (forward swap rate).

In this context, the GOFO rate is akin to a US dollar loan using gold as collateral. Formally, it is defined as the rate at which market-making members of the London Bullion Market Association (LBMA) will lend gold on swap against US dollars. The central bank is then able to reinvest the funds at LIBOR (more recently SOFR) and earn the premium between the dollar rate and GOFO, which amounts to the gold lease rate.

The gold lease rate is typically an over-the-counter instrument, it can be best comprehended through the interaction of the demand and supply of borrowed gold, which will be the focus for the purpose of discussion.

Decades-High Gold Yields – A Potential Boon For Central Banks

While volatile, we project that the market environment is conducive to delivering consistently higher positive lease rates, which should be quite accretive for central banks willing to deposit metal with a bullion bank in good standing.

The World Gold Council model has shown that real rates, central bank gold holdings of CBGA signatories, producer hedging demand, the real price of gold, the VIX and gold spec positioning explained the 3-month lease rate with a 62% accuracy, with the 12-month rate having an even better 74% success rate. TD Securities analysis has shown similar trends.

Generally speaking, positive price sentiment, a decline in the opportunity cost of holding gold and an aggressive increase in central bank holdings have prompted a fall in producer hedging demand and made the gold carry trade and speculative short-selling less attractive. Factors that are price positive have typically reduced borrowing demand, which depresses gold lease rates.

We judge that extremely low central bank interest rates (Fed Funds, other CB policy rates) in the aftermath of the financial crisis, and more recently the COVID pandemic, are a key reason why lease rates were very low between 2010 and 2020. But as real rates across the short end of the Treasury yield curve turn sharply positive and volatility trends higher due to quantitative tightening, sharply higher policy rates and moderating inflation, the conditions which drove lease rates lower will increasingly reverse.

After an outsized 400 tonnes worth of central bank gold purchases in Q3 2022, the official sector purchases are likely to slow relative to the previous pace of accumulation, which should be an additional marginal factor driving gold lease rates above the recent range between 50-75 bps into 2023.

Being Ready Can Be Profitable

Between 1989 and 1999, the gold deposit rate offered a robust source of return for central banks, with the 12-month gold lease rate averaging a hefty 140–200 bps. Since then, however, the rate has fallen sharply, averaging just 54 bps between 2000 and 2009, and we calculate a 15 bps rate between 2010 and 2020.

During the 1980s and 1990s, central banks were aggressive sellers of bullion. As this happened, demand for borrowed gold was increasing at the same time, with many Western European central banks also extending their use of lending, swaps and other derivative instruments. An increase in lending typically resulted in additional gold being sold amid the central bank uncertainty, adding supplies to the market.

The resulting prolonged bear market also prompted miners to take out hedges with bullion banks, helping to create an environment where gold lease rates were elevated and volatile.

But even during this period (2000–21), when the monetary policy and macroeconomic environment were negative for gold interest rates, various one-off liquidity crises events such as the great recession and the COVID pandemic shocks and aftershocks generated brief periods when lease rates rose sharply higher, as these shocks precipitated a large need for US dollar liquidity. Banks and corporations sought to use borrowed gold to raise US dollars, which contributed to spikes in gold lease rates. These were opportunities to use gold reserves to generate generous returns, even when the overall environment was not friendly for these types of trades.

The past suggests that there is even more of a case to be made for lease rate spikes in the current environment. As rates rise and central bank balance sheets are drained, liquidity problems are likely to arise periodically, which could spike lease rates. As such, central bank reserve portfolio managers would be prudent to have all their legal document ducks in the row, so they can capitalise on yield spikes should they occur.

Gold Yields Looking Up

With inflation still raging, the Fed may have no choice but to stick to a hawkish policy stance for a while yet. TD Securities believes that the Fed Funds yield will hit 5.5% and there will be no dovish pivot until late 2023. Conversely, TD Securities judges there will be a general lack of investor interest in gold well into 2023 (as per example: Q3 2022 investment demand, excluding OTC, was down 47% y/y), as the Fed pushed the Fed Funds rate toward 5.50%.

The unwinding of record-setting post-COVID central bank balance sheets, sharply higher equity market volatility and the exit of speculative investors, have already forced non-commercial players (CTAs and other specs) out of all of their long positions, driving prices sharply lower. This helped to lift lease rates up to current fairly high levels, from extreme lows before the tightening.

Aggressive monetary policy tightening has already increased nominal interest rates sharply and reduced inflation expectations, which forced real rates (a key driver of gold) up sharply along the front end, in turn weighing on gold prices. Less investor interest prompted the GOFO rates to lag Treasury yields, pushing lease rates higher. As this trend will continue, particularly on the short end, gold yields also look to be well supported into 2023. This should be exacerbated if physical holders and producers decide to perform some hedging.

Still, large long positions are being held by family offices and proprietary trading shops. Capitulation from these positions suggests there can be more upward pressure on gold lease rates owing to the potential for further downside price risk and higher carry.

By Bart Melek, Global Head of Commodity Strategy, TD Securities

Source: SBMA