Gold prices reach all time highs in both Australia and USA

Prospect of lower interest rates driving gold higher

The Australian dollar gold price hit a record high last week, briefly reaching AUD$3,130 an ounce on Friday morning, December 1. The equivalent US dollar gold price was US$2090.

The record gold price was supported by the prospect that the global interest rate tightening bias of the past couple of years may be coming to an end. The decline in US inflation to 3.2 percent in October 2023, down from 3.7 percent in August and September, is an indication that the US Federal Reserve 2 percent inflation target over time, is within reach. The Reserve Bank of Australia has a more flexible inflation target of 2-3 percent, on average, over time. Falling energy prices were a key factor in the lower US inflation rate. The price of oil has fallen from more than US$90 on 27 September to US$73.77 today, and down 8 percent for the past month.

Lower interest rates generally have a positive impact on the gold price. On the other hand, higher interest rates typically have a negative impact on the gold price. Government bonds and other fixed income securities become less attractive to investors when interest rates are lower, leading some investors to switch from fixed income investments to gold, which of course pays no income. The reverse occurs when interest rates are higher, when some investors switch out of gold and into income producing assets. The logic in this outcome is embedded in the opportunity cost of owning gold, which is high when interest rates are up and is low when interest rates are down. The prospect of lower interest rates in the future is driving the gold price higher today.

Geopolitical uncertainty, including the war on Ukraine and the ongoing conflict in the Middle East, are other factors contributing to the rising gold price.

The USD/AUD exchange rate is also driving up the AUD gold price in that a lower AUD delivers a higher AUD gold price because more AUD are needed to buy the same amount of gold in USD. The USD/AUD exchange rate today is US$0.67 for one Australian dollar, compared to US$0.71 in January 2023.

The bond market tells the story

The prospect of easing US inflation is reflected in current lower US interest rates, compared to recent months. The 10-year US Treasury yield is down to 4.22 percent on Friday 1 December, while the 30-year US Treasury yield is sitting at 4.41 percent. These rates compare to slightly more than 5 percent in October 2023. It is a similar story in the Australian bond market where the Australian 10-year bond rate on Friday 1 December was sitting at 4.45 percent, down from 4.8 percent in October.

The bond market has historically been a reliable barometer for ‘taking the temperature’ of the economy and consistently offers up insightful indications as to the likelihood of future interest rate changes, especially the direction of future interest rates. The US bond market is the largest and most liquid debt securities market in the world and bond markets are roughly 3 to 4 times larger than equity markets. This is because for every dollar of equity there is typically 3 to 4 dollars of debt.

These lower long-dated bond yields portend lower interest rates over the medium to long term and this in turn supports a rising gold price. The extent to which gold prices are likely to continue to rise in the short term however is limited given the gold price uplift already seen recently following positive signals on the inflation front.

Investors would do well to remember the old adage that ‘If it’s in the news it’s in the price’ and so until further positive news is available, the rising gold price may pause for a time until further headway is made on lowering the inflation rate. If this occurs, the accompanying interest rate reductions that follow a fall in inflation are likely to support higher gold prices.

Northern Star Resources

Rising gold prices are immediately reflected in the share price of high-quality gold producers, particularly low-cost producers with tier-1 gold assets and a 100 percent exclusive focus on gold. One such producer is Northern Star Resources, owner of the Super Pit, which has seen its shares rise by nearly 4 percent today and by close to 10 percent over the past week..