Gold is continuing to trade above US$2,000/oz amid a looming credit crunch that is brewing in the US. Almost half of 4,800 US banks have burned through their capital buffer and are running on negative equity – while there are around US$9 trillion of uninsured deposits.

Despite the Fed leading the pack with rate hikes, slapping on another 25 basis points to bring the target central bank funds rate to 5-5.25% – the highest since August 2007 – the US dollar index is showing little sign of strength.

Used as a benchmark to measure the value of the US dollar relative to other widely traded international currencies, as at 8/5/23 it is down almost 12% from its one year high on 27/9/22.

On average, gold is a hedge against equities and a safe haven in extreme stock market conditions. While a portfolio does receive a temporary benefit from gold exposure during a market crash, the commodity also maintains its negative correlation to equities during average times. The potential market volatility and perhaps even meltdown that awaits investors is certainly a driving factor in the latest surge in the precious metal, and given its rival safe haven asset the US dollar is looking weak – gold could be on the verge of a history-making breakout. Head of Commodity Strategy at Saxo Bank – Ole Hansen – sees gold potentially pushing past $3,000/oz before the end of the year.

Central bank’s increased their net gold reserves by 1,136 tonnes worth US$70 billion in 2022 – the largest amount of any year in records going back to 1950. This trend continued into 2023 during the March quarter, as central banks bought a net 228 tonnes of the precious metal, the highest amount for the year-to-date period since they became net buyers in 2010.

Falling head grades are continuing to put pressure on the entire gold mining industry, with the average head grade of the world’s primary gold operations declining 7.5% from its 10-year peak in 2017 of 1.46g/t to 1.35g/t in 2021. As at the end of 2021, it is estimated that there have only been around 205,000 tonnes of gold ever mined, the volume of which would approximately fill one Olympics-sized swimming pool. The amount of proven reserves left in the ground is just 53,000 tonnes.

Large scale M&A is now starting to enter the US$200 billion gold mining market, with the perfect case in point being Newmont’s potential A$29.4 billion acquisition of Newcrest.

Inflation has the potential to be a major positive catalyst for the gold price, and CPI’s have been at 40 year highs in most major economies. During the early stages of the inflation cycle, rising rate expectations and therefore rising nominal US treasury yields act as headwinds to the gold price. However, as rates stabilise and inflation remains sticky, low or even negative real yields become apparent and gold starts to perform – which is playing out in the markets right now.

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Past performance is not a reliable indicator of future performance.