Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Market Strategist
Summary: The Gold price in Australia dollars hit a brand new record high of $3,000, while the US dollar Gold price trades at a year-high, with both prices supported by falling bond yields. Not only is the safe haven metal generating better returns than the US’ S&P500 and Australia’s ASX200, but Gold producers shares are on watch too, with their earnings expected to rise 20 percent on average in Australia. We explore why there is a bull rush for Gold, with central banks poised to buy another record amount in 2023, and what it could mean for Australian Gold equites.
After the RBA kept interest rates unchanged at its April meeting this week, the Australian dollar Gold price roared up to its highest level in history, with the metal breaking above AU$3,000, to trade around AU$3,025. The metals price has gained 23% from its July lows, which includes this year’s 13% gain.
Meanwhile, the US dollar Gold price pierced above the $2,000 level again, after a weaker US jobs report gave hope that the Fed can slow its pace of hikes. The metal trades around $2,027, which is its highest level in a year, and takes its rally to 25% from its September lows, including this year’s 11% gain. We explore what could be next.
Factor one. What’s underpinning strength in the Gold bull-market, is that bond yields are tumbling in anticipation that monetary policy will ease. In our Quarterly Outlook Ole Hansen explores the next catalysts to watch that could push Gold to higher ground. We also explore four other factors to consider below.
Factor two. Central banks have been buying more physical Gold amid continued geopolitical uncertainty and higher inflation. The World Gold Council’s survey suggests these two factors could support further strong demand in 2023. Last year central bank’s purchases of Gold hit a record high, so, you might expect central bank Gold-buying to hit another record high in 2023, given the World Gold Council’s prediction. So far this year, central banks purchases of Gold have increased, with Turkey, China and Kazakhstan being the largest buyers.
Factor three. Another consideration that underpins support in Gold, is that the Gold price has strongly rallied the last three times the Fed paused rate hikes, and then cut. This observation was pointed out by our Head of Commodity Strategy, Ole Hansen. In 2019, when the Fed paused rate hikes, and then cut, the Gold price rallied 61% to a new cycle high.
Factor four. Consider that amid market turmoil, Gold has typically remained steadfast. For example, in 2008, when the S&P500 shed 43%, Australian dollar Gold rose 31% and the US Gold price rose 6%.
Factor five. Consider that Gold not only tends to be viewed as a safe haven, to help cushion the impact of market pull backs, but can also improve the quality of your investment portfolio, by helping an investor carry less risk, and earn returns. This theory was determined by Harry Markowitz, who won a Nobel Prize in Economics by showing how to achieve the best returns in a portfolio, by combining assets with a negative relationship to each other. Harry Markowitz's work continues to be regarded today.
Investment managers will argue Gold should be a part of every diversified portfolio, regardless of an investors time horizon, with some saying a 5-15% allocation to Gold should be considered.
Gold mining companies shouldn’t be ignored either, as their cash flow generation potential has dramatically increased, and this can potentially support future share price growth. At the same time, Gold producers biggest costs are 1-labour 2-diesel fuel and 3-building materials costs, and all have fallen sharply in Australian dollar terms, especially steel costs.
In August 2023, Australian reporting season kicks off, and we think Australian Gold companies financial results will likely show considerably higher margins (i.e. profits) and also higher dividends, in comparison to the same time last year’s results. If market estimates are correct, the 10 listed gold producers in the ASX200 should see average earnings growth of 20% this year, vs the S&P500’s Newmont Corporation, with 12% earnings growth on a blended 12 month basis.
Refer to the list below for Australia’s largest 10 gold producers. You can see their price to earnings (PE) ratios, their share price performance this year, and the percentage of women on their boards.
You can also refer to Saxo's Australian Resources equity theme basket, or Saxo’s global Commodity equity theme basket.
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