October 11, 2023

LBMA Precious Metals Market Report: Q3 2023

An Economic Irony

Through 2023 as the US Federal Reserve, in company with most developed world central banks, battles inflation, economists and commentators have often expressed the ironic view that “Good news is bad news”.

By this they mean that the strength of the US economy and the concomitant tight labour market in the face of a series of interest hikes (three from the Fed this year and still counting), while usually something to be celebrated, is proving problematic. In short, economic resilience in the current environment is making inflation stickier than Jerome Powell and his colleagues on the Federal Open Market Committee, would hope.

Conversely, bad economic news is normally good for the gold price, and so it proved through the first quarter of 2023. Since then however, as leading central banks (with the exception of the Japanese and Chinese) raised interest rates, and latterly, as the Fed clearly expressed its policy of “higher for longer” and surprised many in the market not only with a rate hike on 20 September but also with the suggestion that this was not the end of the cycle, gold embarked on a significant decline with no immediate end in sight as the third quarter drew to a close.

Specifically, the gold price fell from $1913.75 a.m. on 3 July to $1870.50 p.m. on 29 September, a drop of 2.26%, and continued down in the first days of October; a far cry from the spike to $2048.45 on 13 April prompted again by the Fed but, on this occasion, specifically by uncertainty about whether the FOMC had agreed on any sort of effective inflation-busting policy.

Nonetheless, gold has remained in positive territory through the first three quarters of the year, recording a gain driven by the strong first quarter of +1.93% year to date and moreover, a gain of +55.7% in the five years since the end of September 2018, a performance matched by few if any other major asset classes including US equities.

Exchange Rates vs Investment

Country by country, the changing economic face of 2023 has led to variant appetites for gold among central banks, corporate and retail investors, buyers of gold jewellery, and ETFs (which are recording significant 2023 outflows).

For Q2 (the latest figures available), the World Gold Council reported a net increase in overall gold demand of 1,255 tonnes or +7.0% by comparison to Q2 2022.

Central bank buying, strong in 2022 and in the first two months of 2023, declined from March to May but recovered in June to record net purchases of 55 tonnes. This trend continued through the summer with 77 tonnes bought in August (and, unusually, no notable sales). China (+29 tonnes), Poland (+18 tonnes) and Turkey (+15 tonnes) led the charge.

In recent months, activity from the Central Bank of Türkiye (CBRT) has been pivotal to the global trade. Having been a significant net seller between March and May to meet local demand, it returned to net buying in June adding 11t to its official reserves which stood at 440t at the end of that month.

Turkish ‘local demand’ is consequential given the country continues to suffer from exceptionally high inflation (72.31% in 2022 and an estimated 50.58% this year). As the Financial Times reported in August, “Turkish millionaires and companies particularly turned to gold on the OTC market as a store of value, as the lira plummeted to a record low during and after the country’s election in May.”

As markets continue to demonstrate, an increase in interest rates strengthens the currency, and despite significant swings in 2023 YTD, rate hikes by the Bank of England and the European Central Bank (following the Fed), meant that at end-September both sterling and the euro were about 1% higher against the US dollar than at the beginning of January, and the gold price in euros was up some 1.5% ytd.

This is not always good news for gold. Higher interest rates, and therefore real returns on cash for the first time in a decade, have had a notable impact on German retail gold demand as Bullion Vault explained on 24 August: “Gold coin and small-bar investment demand in Germany has collapsed so far in 2023, down by 75% from the first half of 2022, as the precious metal trades near all-time record prices and interest rates on cash-in-the-bank finally rise.”

In Japan by comparison where the Bank of Japan maintained its key short-term interest rate at -0.1% and that of 10-year bond yields at around 0% in its September meeting, the picture is very different. The yen this year has fallen 14.1% against the dollar to end September at an exceptional exchange rate of ¥149.3749/$1.00. This collapse has prompted a boom in gold demand with the retail price of gold reaching an unprecedented ¥10,000 per gramme as household attitudes to risk shifted dramatically after years of deflation. (Japan’s current inflation rate is some 3.1%).

Gold 2023 % Quarterly Performance

By comparison to the first three quarters of 2023, and to Q3 2022, gold and silver both traded in a comparatively narrow range in Q3 2023. Low to high, the gold price was confined to a $111 range or 5.93% (11.75% in Q3 2022), and silver to $2.765 or 12.34% (15.9% in Q3 2022).

Interestingly both metals touched their highs for the quarter on the same day (20 July), suggesting that the silver price, in the current environment, may have been more responsive to economic and inflationary concerns than is usual given that some 50% of the annual production of silver is employed in industrial applications.

That said, to end-September the 2023 LBMA silver price fell -5.02%, while loco London vault holdings rose through the year to end September by 5.5%. During the same period, gold vault holdings fell 3.4% to 280.583m oz – the lowest total since June 2020.

Key Statistics: 2023 Q1 and H1

Gold - Q3 2023 2023 YTD
Performance 3 Jul – 29 Sep -2.26% 3 Jan - 29 Sep +1.93%
Price High – 20 Jul AM $1981.50 Price High – 13 Apr PM $2048.05
Price Low – 29 Sep PM $1870.50 Price Low – 27 Feb AM $1809.05
Low/High Range 5.93% Low/High Range 13.21%
Volume High - 27 Sep 45.30m oz Volume High – 6 Apr 47.20m oz
Value High - 27 Sep $85.50bn Value High - 6 Apr $94.6bn
Average Daily Volume 35.77m oz Average Daily Volume 34.15m oz
Average Daily Value $65.14bn Average Daily Value $66.04bn
Silver - Q3 2023 2023 YTD
Performance 3 Jul – 29 Sep +1.31% 3 Jan - 29 Sep -5.02%
Price High – 20 Jul $25.175 Price High – 14 Apr $26.025
Price Low – 15 Aug $22.410 Price Low – 10 Mar $20.090
Low/High Range 12.34% Low/High Range 29.54%
Average Daily Volume 361.57m oz Average Daily Volume 368.60m oz
Average Daily Value $8.55bn Average Daily Value $8.65bn