18 October 2022
By Mark Smith
The US Fed’s aggressive rate hikes continues to translate to higher treasury yields and the fuelling of the US dollar performance against the major currencies. This has caused bullion to trend lower as higher interest rates put pressure on non-yielding assets. The dollar remains extremely buoyant aided by Japan’s easing monetary policy, and then the Bank of England pivoting from an expectation of tightening to announcing another round of quantitative easing (£65bn pledge!). The fact that Australia only raised interest rates by 25 points - versus the expectation of 50 basis points-, coupled with US job openings dropping by 1 million led to speculation that the US Fed may also pivot soon. This led to a sharp rebound in the gold price and, especially, gold and silver equities. However, a strong US employment report for September squashed any thoughts of a Fed pivot and the gold price came back under pressure (in US dollar terms).
The dollar strength over the past eighteen months has proved to be a significant headwind for precious metals, especially with regards to sentiment towards gold and silver equities, and bullion itself. Net gold ETF sales totalled 285 tonnes in 2021. The start of the conflict in Ukraine in February 2022 saw a surge in ETF buying. However, this has more than reversed itself in recent months as the dollar replaced any considerations of gold or silver as safe havens. Speculators also stepped back from the market with net long positioning on COMEX now near record low.
The gold and silver bullion markets appear fundamentally oversold, and the underlying equities extremely oversold. The silver price actually hit a low of US$17.92/oz in late September, which is well below the average all-in-sustaining-cost of production. This was driven by record selling out of the LBMA vaults. The behaviour of the market in late September suggests that the precious metals market is currently very tight, judging by the behaviour of prices when just the thoughts of the US Fed pivoting caused short-covering and renewed buying in gold and silver.
We maintain that the need for the Fund to hold precious metals as a risk diversifier is probably as strong as it could ever be. However, we are not going to stand in the way of a surging dollar while the Fed continues to raise interest rates. Another 75 basis points hike in November and 50 basis points in December is already discounted by the market in the gold price right now. The market is likely to wait until December before seriously considering gold and silver again, barring any unanticipated negative developments.
After attending the Precious Metals conference in Colorado and conducting 35 one-on-one meetings we identified 4 exciting gold and silver development opportunities and decided to sell out of 2 silver investments. We are building positions and will comment further once we achieve portfolio weightings. The lithium stocks continue to appreciate and Sigma Lithium has become our largest position. We have trimmed Sigma Lithium to manage development risk and redeployed profits into the 4 new investment opportunities.