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Gold hugs key price level

08 October 2021

Friday 8 October 2021

In this week's market report:

  • Gold hugs key level

  • Indian bullion imports surge by 658% over past year

  • Will Poland be the world’s biggest gold buyer in 2022?

  • Gold’s link to oil

  • Inside the office this week

  • Before you go…

Shae Russell

Shae Russell,
Group Communications Manager

Dear Investor,

US dollar gold price [XAUUSD]
Daily chart

US dollar gold price Daily chart

(Click to enlarge)

Source: Trading View

Gold on pause: Another week of minimal price action. In the past seven days gold has barely budged US$25 per ounce. The week started strong with gold breaking above that downtrend line.

Yet…Au hugs US$1,750 ahead of payroll data on Friday night: US Nonfarm payroll data will be released on Friday night. Good data — the kind that favours more people being employed — could push gold lower.

  • Why? Because the more positive the news is for the US economy, the more certain the market becomes the Federal Reserve Bank will start to reduce tapering.
  • The US dollar remains at a one year high, further damping any enthusiasm for gold.
  • Managing partner at SPI asset Management Stephen Innes said: ‘If we get a strong employment number and US yields move towards 1.6%, gold could trade down to $1,725.’

Estimates vary for Nonfarm payrolls: There doesn’t appear to be a consensus on what to expect in the September Nonfarm payrolls, with estimates varying from 525,000 to 700,000. TD Securities is at the lower end, Morgan Stanley at the higher end and Goldman in the middle of the two. Either way, we’ll know more tonight.

US bonds go up…again: US bond yields rose this week. Again. The market holds the view that soon-to-begin tapering is ‘baked in’ and expecting a slowdown in monetary expansion in the US.  

Market re-asses Fed’s views: From the Sprott Monthly Report:

‘Rather than fear the [Federal Reserve Bank’s] tapering message, markets took it to signal that the macro-economic environment was becoming healthy enough to get by without additional government assistance. That notion further weakened interest in gold as summer gave way to fall in the third week of September…’

Bulls, it comes down to the currency you’re buying with this week: In US dollar terms, gold is stuck around a key price level. Au looks to have broken above that downtrend line from last week. If you’re buying gold with Australian dollars, then this is your moment.

Nonfarm payroll data may encourage the bears: Strong employment numbers may see gold get pushed down to near the September lows, which is around US$1,725.00 per ounce.

Gold to silver ratio now favours silver: The gold to silver ratio (often just written as gold:silver) has sold off slightly from last week, but is holding steady at 78 today. The higher the ratio, the ‘cheaper’ silver looks compared to gold. 

Australian investors, ready yourselves to buy gold: The Australian dollar has strengthened overnight despite the Reserve Bank of Australia’s slightly dovish tone earlier in the week. With the Aussie dollar rising to 73.20 US cents overnight, the Australian dollar gold price has fallen below US$2,400. In recent weeks we’ve seen many ABC Bullion client’s take advantage of gold dipping and using this as an opportunity to top up their gold positions.

 

Australian dollar gold price [XAUAUD]
Daily chart

(Click to enlarge)

Source: Trading View

A note from the Reserve Bank of Australia: The minutes from the RBA meeting earlier in the week continue to support the ‘transitory inflation’ narrative from overseas. Worth noting are the implemented changes in our stimulus program.

  • Initially proposed in July but made effective this month, our bond buying program has been reduced from $5 billion per week to $4 billion per week.
  • The end date has changed. The $5 billion weekly program was scheduled to end in November 2021, whereas the $4 billion per week program has been extended to ‘at least’ mid February 2022.

Indian bullion imports surge by 658% over past year

Indian gold bullion imports surged 658% year on year to 91 tonnes. Granted bullion sales in India were coming off a low base after, 2020 drastically slowed bullion sales.

 

Will Poland be the world’s biggest gold buyer in 2022?

The Polish central bank — Narodowy Bank Polski — has hinted that it may buy 100 tonnes of gold in 2022, with its President Adam GlapiƄski saying earlier during the week:

‘In order to further increase Poland’s financial security, we will continues the current policy, we will certainly strive to increase our gold holdings. The scale and pace of purchases will depend, inter alia, on the dynamics of changes in official reserve assets and current market conditions. I initially assume that I will propose to buy a further 100 tons (sic) in 2022.’

Gold’s link to oil

Oil prices rose over 9% for the month of September in contrast to gold’s 3% fall. With Fed inflation data running hot and commodity prices in general storming ahead, there’s been a handful of articles written asking why gold isn’t joining crude’s rally.

Simply put, the connection between gold and crude prices isn’t always close. In fact Market Realist says that prices for the two commodities correlate 60% of the time.

Furthermore, if you look at the scattergram (below), in the past two decades we can see several clusters between both crude and gold prices that both support prices moving together but also highlight their divergence.

The price of crude is shown on the X-axis (the deciding variable) and gold is on the Y-axis (dependant variable).

Brent-Gold Regression
January 2000 – Present

(Click to enlarge)
Source: Bloomberg

While the scattergram slopes upwards, suggesting that lower prices go together, it isn’t as simple as that. For starters it’s not a useful tool in either predictive value, or confirming the thesis that both gold and oil move in tandem. Meaning, a move on the X-axis doesn’t definitively equal a move on the Y-axis.

The clustering of prices in certain groups, however, tells us there are periods where the two commodities move together, but periods where they don’t.

Case in point is the red dot on the scattergram. That red dot is this week’s oil and gold price.  

This red dot is a somewhat rebuttal to the idea of a lockstep dance in oil and gold. The red dot is far from an outlier. If that red dot was somewhere in a sea of white, it would be very strange, but it’s surrounded by other dots representing past prices.

There are particular issues pushing oil up, though they aren’t related to too much demand or an over stoked, red hot like environment for oil. Rather, the impact on oil prices has come from month-old weather related events over the Gulf of Mexico, potential oil substitution in China and OPEC being unprepared to increase output.

Of course, this doesn’t mean that the rise in crude prices isn’t inflationary. We don’t know how sticky the price shocks will be. Yes, inflation is persistent, but the kicker is supply. In addition, none of the supply crunch factors for oil impacts gold…yet.

Inside our office this week

Gold may be down, but it’s not out. This week it’s been a battle of the ‘big’ bars.

We’ve seen not only numerous buyers for our LBMA accredited 400oz bullion bars, but many investors have been keen to buy our 1kg ABC Bullion gold cast bar as well! Alice (right) in our Sydney office just happens to be the Queen of selling our big bars!

Before you go…

Is platinum a commodity or a precious metal?

Today I chat with Trevor Raymond, director of research of World Platinum Investment Council, to discuss the investment case for platinum, understanding the concentrated supply of platinum group elements and how it takes 3-4 years to increase production.

Until next time,

Shae Russell
Group Communications Manager, 
For ABC Bullion

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