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​Gold Marches Higher on Oil Tanker Attack

14 June 2019

Precious Metals Commentary

Gold marched higher as news filtered through of two oil tankers being attacked by torpedoes in the Sea of Oman. Gold rallied to USD$1,345 and silver to $14.95; with the AUD/USD back down to 0.690 US cents, we see gold trading into fresh new highs of AUD$1,952 and silver at $21.70.
Gold price chart
It seems our call from a few weeks ago for AUD$2,000 gold by end of year could potentially happen sooner than expected, particularly if we have further escalation of US/Iran tensions.

Iran firstly denied any involvement in the attack, then some time later, US officials blamed Iran for the attacks and released a video showing what they claim to be Iranian navy ship removing an unexploded mine from a Japanese boat.

One could be forgiven for failing to see the strategic motive for Iran to draw attention to themselves during a period of escalating US tensions, but regardless of who carried out the attacks it will be the retaliation that matters, and Iran is set to cop the brunt of it by the looks of it.

Gold in AUD terms has already returned 3.8% since the start of the month, most of which was before the news above. We will likely move in step with how things progress in this story, so we will be watching closely as the response plays out.

Asia Pacific Precious Metals Conference

ABC Bullion was a Gold Sponsor of the Asia Pacific Precious Metals Conference held in Singapore earlier this week. While only in its third year, it is now one of the must attend events for gold market participants in this region with over 380 attendees.

Below are some highlights from the presentations.


Gold as a Strategic Asset

Alistair Hewitt from the World Gold Council (WGC) noted the criticism that gold does not earn a yield but he made the point that what matters is total return. In the case of company shares, for example, they may pay a dividend but that is only half of the picture, as the share price can also go up (or down). So one has to look at the total return, yield + price appreciation, when looking at any investment.

So, yes, gold doesn’t pay dividends, but how does its total return compare to other investments? The chart below shows that over various timeframes gold compares favourably to major asset classes.
Gold's long term performance
The other chart from Alistair we found interesting was the one below which covers the last 30 years and makes the case for gold as a good portfolio diversifier.

correlation of US stocks vs gold 
The σ symbol is shorthand for “standard deviation”, a measure of variability. The reference then to “by more than two standard deviations” is referring to periods when the stock market goes up (or down) a lot more than normal. Correlation is a measure of whether two things move together.

The chart is quite technical, but the WGC use it as it resonates with fund managers as it shows that gold “works” in extreme up or down markets, with a tendency to rise in either case. Gold thus helps to diversify your portfolio.

Alistair said that the reason gold behaves this way is that its supply and demand are diversified. On the demand side, gold’s buyers are quite different, be they jewellery, industrial uses, investors or central banks. They also buy at different times of the year. In addition, this demand is global, so gold is exposed to many different country business cycles. Finally, gold’s supply is spread across the globe as well.

So diversified supply/demand = diversified price behaviour = good portfolio diversifier.


Gold Allocations to Increase

Bart Melek from TD Securities said that gold prices are unlikely to break out until money managers increase their allocations to gold. Current allocations are below average for the stage we are in the business cycle, so Bart saw plenty of room for them to grow (and thus give gold a boost) and as share price volatility picked up gold will become a more attractive diversifier for fund managers.

He said that “gold bugs looking for prices to rally will need to be patient and should know it likely won’t take too long for portfolio weightings to start to tilt into gold again”.

On recent central bank buying, Bart noted that emerging markets have room to grow their gold reserves, being well below that of other countries, as the chart below clearly demonstrates.

Gold Reserves 

Bart also made an interesting observation that Commodity Trading Advisors (CTA) were about 35% of the market and that TD Securities builds models of CTA portfolios and factors them into their price predictions. He said that he was shocked how predictable TD’s estimate of CTAs trigger levels can be. Looks like traders need to smarten their game, lest they continued to be gamed.


Asian Demand Set to Grow

ABC Bullion’s Nick Frappell was on a panel about the Asian gold market. He said that while the focus was currently on the China-US trade dispute, he expects that the US will turn its searchlight to smaller Asian economies that run a trade surplus with America (which is basically all of them apart from Brunei and Singapore).

If that happens, Asian currency, corporate bond and equity markets are likely to face real headwinds, and this will help to emphasise gold’s role as a hard asset in portfolio diversification, and a hedge against currency and political risk in the region.

Nick also noted that demand for gold in the Asia is likely to supported by strong growth in total wealth per adult, as the chart below shows.
Total wealth by region

These rising wealth levels will be a positive influence on both gold jewellery demand and investment demand for gold over the medium and long term, with current geo-political tensions also likely to spur demand via pressure on other asset markets and local currencies.


Exchanges Versus over the Counter

Gold is traditionally an “over the counter” (OTC) market. The phrase isn’t just literal in that retail investors buy gold at a physical shop, but is also used in the trade to refer to deals done directly and privately between two companies. With increasing regulations meant to reduce to chance of another global financial crisis, and bad behaviour, there is pressure to move trading to exchanges where they can be observed and risks minimised via centralised trade settlement.

There was a session on this issue which had heavy hitters from the SGE, CME, LME and HKEX. In short, it was agreed that there was still a role for the OTC market as it provided flexibility that exchange traded contracts couldn’t.

The use of Exchange For Physicals (EFP) was seen as important, as it allowed liquidity to flow between exchanged traded contracts like Comex futures and the London OTC market.

The CME quoted one interesting statistic that of the 8 billion ounces of gold that traded in 2018 on Comex, volumes coming from Asia Pacific had tripled and close to 40% of Comex’s volumes now came during Asia Pacific hours.

Just another example of the shift of gold (trading) from West to East.


Australian Gold Production

Thuong Nguyen from the Federal Department of Industry, Innovation and Science reported some interesting figures on Australia’s gold production. Noting that Australia is the world’s second-largest gold producer after China, he said we would increase our current 315 tonnes of gold to a peak of 346 tonnes by 2019-20.

We currently have five of the world’s 20 largest gold mines, which produce 95 tonnes, or 2.8% of the entire world’s gold production.

The chart below shows average gold mine all-in sustaining cost (AISC) by selected major gold producing countries. Note how expensive South Africa is, which is why the amount of gold they produce has been declining for many years.

Gold mine AISC costs by country
Australia’s average AISC of USD 742 is reasonable competitive but note how cheaply China and Russia can mine gold. As we noted last week, China and Russia have been accumulating gold aggressively for many years. Given those low production costs, it makes sense for them to accumulate from a whole of economy point of view even if there were no geopolitical reasons.

Thuong reported that Australia’s economic demonstrated resources (that is, gold in the ground that can be profitably extracted) is estimated at 10,070 tonnes. This is about 18% of the total world resources and the largest of any country in the world.

One final statistic was Thuong’s estimate that us Aussies consumed 54 tonnes of gold in 2018. He did admit to us afterwards that this was probably overstated but it is only about a tenth of an ounce per each Australian adult.

So while we might be #1 for gold resources and #2 for gold production, we certainly are at the bottom of the pile for keeping our gold in the country.


Price Outlook

The last session had three analysts give their assessment of each of the four precious metals.

Joni Teves from UBS said that the gold had “risk to the upside” as US economic growth deterioration would provide a catalyst for gold to rise due to the Federal Reserves having to cut interest rates leading to declines in real interest rates and the US dollar.

Her forecast was for $1,325 by the end of the year (hopefully in conjunction with Westpac’s 66c call on the Aussie dollar, as we discussed a few weeks ago) with a range of $1,230 to $1,425.

Nikos Kavalis from Metals Focus covered silver and said that silver was a “high beta trade on gold” (in non-geek speak: when gold goes up or down silver goes up or down more). However, he said that when we move into a bull market, silver is not going to have a massive run as he saw the ratio only dropping to 70. Silver would still do well but not as much as some are expecting based on his assessment of the supply and demand fundamentals.

On platinum, Bruce Ikemizu from ICBC Standard said that the fundamentals are bearish and he saw a range of $770 to $920. He said that priced below $900, “platinum is too cheap even in this market and would hopefully move closer to $1,000 if gold reached $1,400”.

On palladium, Bruce was positive noting that a supply-demand deficit has persisted for the last 7 years and didn’t see that situation changing in near future. He saw no risk from substitution of platinum for palladium into catalytic converters as changing manufacturing processes takes time and is not cheap. He saw palladium trading in a range of $1,275 to $1,500.
Until next time,
John Feeney and Bron Suchecki
ABC Bullion
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at, or call us during trading hours on 1300 361 261.
ABC Conference
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