Gold’s surge past its 2011 high leads a stealth rally in Bitcoin and government bonds that tell a more ominous story than the performance of the equity market suggests.

The Australian Office of Financial Management’s forthcoming 30-year bond auction attracted $20 billion of orders on Monday, which could be exceeded before the deal is ruled off on Tuesday. Huge offshore interest in Australian government debt is enabling the Morrison government to fund JobKeeper, JobSeeker and pay for a record $185 billion deficit.
Gold’s rally has also elevated the place of gold as one of Australia’s most important but volatile exports: the economy shipped $2.29 billion of gold according to the June trade figures, up 67 per cent month on month. In March, Australian gold’s export value was $2.47 billion a 225 per cent increase as the bear market erupted.
ETF buying
James Stewart, a resources portfolio manager at Ausbil, said the fundamentals of low rates, feeble returns on risk-free assets, and abundant liquidity were creating interest in gold.
“If you’re looking for the main driver of gold in the short term it’s really the inflows into both physical and exchange-traded funds [ETFs]. In terms of physical [gold], ETFs are seeing a lot of attraction at the moment.”
Record global inflows have sent gold ETF holdings to all-time highs. The ASX-listed VanEck Gold Miner ETF is up 44 per cent in 2020 to a record closing high of $60.75 on Monday.
Certainly the stimulus packages we’re seeing in Europe are a shot in the arm [for gold]. Alongside the resurgence in virus cases ringing alarm bells.
Daniel Hynes, ANZ commodities strategist
Daniel Hynes, commodities strategist at ANZ Bank, agrees the kicker for gold could be bond yields falling at the same time as moribund global inflation picks up.
“We haven’t really seen to date any pick up in inflation. We have a model valuation for gold driven by real bond yields, which takes into consideration inflation. So inflation expectations are a key part if there’s any signal it’s starting to pick up that’d be a driver of a break higher.”
Mr Stewart nominated gold miners Northern Star and Saracen Minerals as two of his preferred gold plays. The WA miners own a 50/50 stake in the Kalgoorlie Super Pit.
“We think the market is underestimating the production potential for the Super Pit in, call it, two years out. From our side we think it’ll breach 700,000 ounces of annualised production.
“On the exploration side we think Bellevue Gold is interesting, which we own. It has a very high grade, 11.6 gram resource, increasing in scale and quality. It’s a relatively small deposit, which means it’s very easy to develop.”
Antiques roadshow
After the gold standard was dropped as an official exchange rate mechanism in 1971, gold has historically shone at times of war or geopolitical tension including the Iran-Iraq war, the Gulf War of 1990, the 9/11 attacks and the subsequent invasion of Iraq.
On January 6, 2020, its price spiked after the killing of Iranian general Qassim Suleimani by a US drone strike in Iraq. Its rise has also been commonly associated with the US-China trade war of 2019-20.
While Australia’s inflation outcome is widely expected to be close to zero for the June quarter, bets are mounting that the world’s biggest economy is about to experience higher inflation.
The US 10-year Treasury bond is yielding just 0.579 per cent. Meanwhile, market-based measures of 10-year inflation expectations are trading at 1.5 per cent, implying 1.5 per cent on average a year for the next decade, from as low as 0.55 per cent earlier this year.
Gold’s rise has captured the interest of passive investors who rely on exchange traded funds, backed by physical reserves.
Next best thing
Silver hit $US23.27 an ounce on Monday and has now almost doubled since March in reaching a seven-year high in Australian dollar terms.
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Gold added 4.7 per cent last week after European Union leaders agreed to a 1.8 trillion ($3 trillion) coronavirus support package on top of an estimated $US18 trillion ($25 trillion) in liquidity already pumped into the global economy.
“Certainly the stimulus packages we’re seeing in Europe are a shot in the arm,” said ANZ’s Mr Hynes. “Alongside the resurgence in virus cases ringing alarm bells.”
Reset expectations that a global recession will last longer than anticipated had fuelled gold’s latest leg higher.
“There was some caution around whether these monetary easing programs would continue indefinitely if economies reopened,” said Mr Hynes. “I think the market has realised this is an issue that will persist for some time and governments are going all out to buffer their economies from it.”
More uniquely, silver has surged since March on COVID-19-related supply disruption in Latin America, and the same positive macro fundamentals enjoyed by gold. Iron ore production has been similarly affected, specifically in Brazil.
Dennis Karp, the chairman of listed gold and silver miner Manuka Resources, said the Silver Institute is tipping a 5 per cent global production fall in 2020.
“That’ll mean five consecutive years of production decreases. We’ll be back down to 2009 levels and the world has changed with new tech sucking up demand.
“What you’ve seen recently is ETFs have suddenly chipped in and made a substantial dent in global supply.”
According to Mr Karp, about 1 billion ounces of silver are produced each year, versus 150 million ounces of gold.
The silver price has historically been valued on a multiple of the gold price.
Today one ounce of gold at $US1944 sells for 81 times an ounce of silver at $US24.12. In March that ratio ballooned to more than 100 as COVID-19 dislocated asset markets, but Mr Karp said it should return to a historical 40-year average between 40 to 80 in time.
Manuka is targeting a run rate of 2 million ounces of silver per year by 2021.