Old is Gold, so is true Gold

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After our recent write-up on gold, we have seen considerable softening of Gold price as it hit an all-time high. Indeed there are three main reasons for the propelling price of gold:

We are seeing lower bond yields,
A weaker US dollar is happening,
Persistent economic worry.

So, let’s get into the details.

After the fallout of Silicon Valley Bank, there has been a feverish purchase of gold. it is up by about more than 20% since last November. Its rise also pushed other metals, such as silver which has seen a tremendous upward swing, larger than gold.

Safe Haven- Here we come!

With a flight to safety, investors for the past month have been finding a resilient harbour to park their cash. The bank turmoil had cast a shadow on possible secondary ripple effects and widespread implications on the US financial system.

Human history has repeatedly shown us that gold is an old store of value and tends to appreciate in value when all things seem uncertain. That perfectly matches the current geopolitical and macroeconomic environment.

Multitudes of factors support gold prices.

The above three factors have provided strong evidence for the continued interest in gold. Last week, more analysts are acknowledging that perhaps the Fed is reaching a pivotal point- that we may not need to increase interest rates as aggressively as before.

Also, with the recent CPI data, headline inflation is also moderating, and the minutes from FOMC showed that debates are arising about whether the Fed should pause interest rate hikes.

PPI data also reflected a softening cost pressure by producers. Collectively, it points to the possibility of an end in the Fed’s tightening cycle, and bond yield decline reflects a new “reality” to come.

Falling bond yield, weighing on the US dollar

A look at the 2-year Treasury yield saw it decline to below 4% from the high of 5.1% seen in March. So how does it affect gold?

Consider this logic: when bond yields are lower, it reduces the opportunity cost of holding gold since gold does not produce income. In fact, some research is projecting a further decline of the 10-year Treasury yield that is hovering around 3.5% region to 3.25% area.

Indeed, we are seeing a decline in the US Treasury yield larger than those seen in other overseas yields, and that is putting further pressure on the US dollar. Therefore, an ounce of gold is worth much more as the dollar weakens.

Recession possibility- Uncertainty checked!

With more investors and economists believing that the US will enter into a recession, with a tighter lending condition seen after the banking turmoil, the Fed could shift towards even a rate cut faster than market analysts expect, despite the Fed insisting rate cut is not on the horizon. The catch is – sooner than expected. Thus, no time frame is warranted. But the belief is sufficient as a signal, I would say.

So this sentiment translates to yet a lower bond yield, a weaker dollar and a defensive bet, and funds flow into gold-related counters. (Look back at our prior writing, as gold counters and gold miners are two separate natures of the investment.)

Big boys are buying up gold too.

Other than the Singapore government adding more gold into its reserve, other countries are also allocating more gold in their reserve allocation. Some data from the World Gold Council indicated that central banks globally had added a net sum of 157 tons of gold just within the first two months of 2023, which is the fastest pace seen in a decade for any start of a year.

While the US dollar remains the dominant reserve, there is an inclination to diversify. China has been a key buyer. They purchased around 15 tons of gold in January and about 25 tons in February. Even the central bank of Turkey bought around 46 tons of gold during the first 2 months of 2023. Russia, which is at odds with Ukraine, boosted its reserve with 31 tons of gold in February.

While god is at an all-time high, if we have adjusted in inflation for real terms discussion, we can trace back some old records as a reference based on our reading. It is said that back in 1980, the gold price actually hit a record high of $3000 in today’s dollar terms after adjusting for inflation. It comes at a time when the US had left the gold standard and ushered in an era of persistent inflation and a recession.

I don’t think a $3000 is coming soon, but with the 3 factors playing out, it is working in favour of gold prices, and perhaps the animal spirit will unleash for gold prices to run yet again.

Thank you for reading, and see you in our next write-up!