Weekly Update: Navigating the Gold Market

Let’s dive straight into the recent happenings in the gold market…

Bullion.Directory Market Summary
By Alice Walker
Investor Relations Manager at Bullion.Directory

We’ve witnessed a fascinating interplay between gold prices, economic data, and ETF movements.

Gold prices have erased a bounce from this week’s steep plunge in London trade, dropping back to 6-month lows against the Dollar and reflecting the outflows from gold-backed ETF trust funds such as the GLD.

China, a dominant player in the gold market, has seen gold prices experience a five-day run of new record highs before a notable retraction.

The country’s approach to import restrictions, particularly the central bank’s stringent stance on issuing new gold import licenses, has been a pivotal factor influencing these price movements.

The Shanghai Gold Exchange (SGE) has been active amidst the fluctuations in Yuan gold prices, issuing notices to enhance handling and service times in the warehouses holding bullion for trading.

This proactive approach ensures a streamlined trading activity, even as the market experiences fluctuations.

Gold futures contracts in China have aligned with a peak in Shanghai’s physical price at ¥480 per gram. The domestic SGE’s main gold contract reported a trading volume of 6.5 tonnes, while the international bourse’s comparable gold contract saw a significant surge in trading volume, more than seven times the week’s previous daily levels.

Mixed economic data from China, including a decline in house prices in major cities and growth in retail sales and industrial production, have painted a complex picture of the market where despite positive indicators, the Chinese stock market has remained unchanged, reflecting the intricate interplay of various economic factors.

In the US, stronger-than-expected figures in retail sales and producer-price inflation have fueled expectations that the Federal Reserve might maintain higher Dollar interest rates for a longer duration. This development is crucial for gold investors, as interest rates significantly influence gold prices.

Meanwhile the GLD gold-backed ETF has shrunk in 7 out of 9 months so far in 2023, reducing by more than 5.2% across the third calendar quarter of the year to reach its smallest size since August 2019.

In contrast, the giant SLV silver-backed trust fund has expanded as prices have fallen in September, growing by 0.8% to make the first monthly inflow in three.

US Recession Incoming

Predicting recessions is notoriously difficult due to the myriad of unpredictable and volatile variables at play. As witnessed through events like the Ukraine war and the COVID-19 pandemic, even the forecasts of highly esteemed economists can be derailed.

Albert Edwards, a strategist at the French investment bank Société Générale, aptly noted in a recent communication: “History shows that, to the (limited) extent economists do actually predict a recession, its tardiness usually means they give up waiting just at the point it arrives.”

Despite the (apparently) persistent robustness of the U.S. economy, Deutsche Bank’s economists are now doubling down on their recession prediction.

As the first major investment bank to predict a U.S. recession in 2022, specialists at the venerable 153-year-old German institution have remained resolute this year, cautioning about another inevitable American “boom and bust cycle.”

To substantiate their forecast, a team from Deutsche Bank, spearheaded by Jim Reid, the head of global economics and thematic research, recently scrutinized 34 U.S. recessions since 1854, seeking patterns in economic history.

The team identified four principal macroeconomic triggers historically linked to recessions: swift increases in short-end interest rates, inflation surges, yield curve inversions, and oil price shocks.

Reid and his team have determined a historical “hit ratio” for each trigger, representing the percentage of instances when these events transpired and subsequently led to a recession.

Their findings reveal that while no single macroeconomic trigger can precisely predict a recession, all four triggers, most commonly associated with recessions, are presently occurring – which for anyone should be a major red flag.

Reid said, “It’s impossible to accurately predict every recession using macro triggers,” adding, “But it’s fair to say that the most significant ones [triggers] have been breached this cycle and that the U.S. tends to be more sensitive to these historically.”

Taking a Closer Look at Deutsche Bank’s Recession Triggers and Their Predictive “Hit Ratios”

• A Rapid Ascension in Interest Rates – 69%
  Rising interest rates traditionally burden economic growth by elevating borrowing costs for businesses and consumers, frequently leading to recessions.

  According to Deutsche Bank’s study, when short-term interest rates have ascended by 2.5 percentage points over a 24-month period since 1854, a recession has ensued within three years approximately 69% of the time. Reid noted, “The U.S. seems to have the most sensitivity to interest rates,” and emphasized that “the U.S. cycle has historically been more boom and bust than others in the G7.”

• An Inflation Surge – 77%
  Despite inflation retreating to a milder 3.7% from a four-decade high above 9% in June of 2022, the U.S. economy has historically struggled with inflation spikes.

  A three percentage point rise in inflation over a 24-month period has instigated a recession within three years 77% of the time since 1854.

• An Inverted Yield Curve – 74%
  When short-term bonds yield more than long-term bonds, it’s termed a yield curve inversion. U.S. Treasuries have been in inversion since July 2022, and historically, this has not boded well for the economy.

  Reid explained, “On yield curve inversions, the U.S. again has the highest hit ratio at 74.1%,” and added that “focusing just on the period since the 1953 recession, that rises to 79.9%.”

• An Oil Price Shock – 45% Although Brent crude oil prices have surged approximately 33% since June to over $95 per barrel, Deutsche Bank found that oil price shocks are less indicative of impending recessions than other macroeconomic triggers in the U.S.

  Historically, when oil prices have spiked 25% over a 12-month period, the U.S. has encountered a recession 45.9% of the time.

 

Investors find themselves amidst a confluence of macroeconomic triggers, each historically associated with recessions, all currently in play.

The steadfastness of Deutsche Bank’s economists in their recession prediction, despite the U.S. economy’s ongoing resilience, underscores the critical importance of vigilance and strategic positioning in investment approaches. As we observe the simultaneous unfolding of rapid interest rate increases, inflation surges, yield curve inversions, and oil price shocks, the historical “hit ratios” serve as a sobering reminder of the cyclical nature of economies.

Investors are thus encouraged to approach the coming periods with caution, ensuring that their portfolios are diversified and resilient against the potential economic headwinds that may lie ahead, navigating through the complexities with informed and judicious decision-making.

And my top choice for a diversification asset? Well if you need to ask you’re on the wrong website…

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