Gold demand surges as faith in US assets fades | Close of Business | ABC News

Key Concepts

• Gold as a Safe Haven: An asset perceived to retain or increase in value during times of market turbulence or economic uncertainty.
• Inflation Hedge: An investment intended to protect against the decreased purchasing power of a currency that results from inflation.
• Central Bank Buying: National banks purchasing gold to diversify reserves away from other assets, typically the US dollar.
• Geopolitical Risk: The risk of political events or instability impacting markets and economies.
• Fear of Missing Out (FOMO): A psychological phenomenon where individuals feel anxiety about potentially missing out on profitable opportunities.
• US Dollar as a Safe Haven: Historically, the US dollar and US Treasury bonds have been considered safe havens due to the stability of the US economy and government.
• Federal Reserve Independence: The principle that a central bank should be free from political interference in its monetary policy decisions.
• Gas Reservation Policy: A government policy requiring a certain percentage of domestically produced gas to be reserved for domestic use before being exported.
• Price Cap/Price Floor: A government-imposed limit on how high (cap) or low (floor) a price can be charged for a product or service.
• Copper Deficit: A situation where the demand for copper exceeds its available supply.
• Electrification: The global shift towards using electricity as a primary energy source, particularly in transport and industry.
• ASX 200 / All Ordinaries: Key indices representing the performance of the Australian share market.
• Risk-on/Risk-off Sentiment: Investor behavior where "risk-on" indicates a willingness to invest in riskier assets, and "risk-off" indicates a preference for safer assets.
• Concentration Risk: The risk associated with having a large portion of investments in a single asset, sector, or small number of holdings.
• Rare Earths: A group of 17 chemical elements critical for various high-tech applications, including defense and electrification.
• Franchisor Business Model: A business model where a company grants licenses to individuals or groups (franchisees) to operate under its brand, typically receiving royalties.

Gold Market Frenzy and Global Economic Uncertainty

The price of gold has surged, breaking the $4,000 US barrier this week, marking a 50% increase in the past year. This makes gold on track to become Australia's second most valuable export, surpassing LNG and trailing only iron ore. The primary drivers for this frenzy are global uncertainty, including the risk of recession in the world's largest economy (the US), and gold's role as an excellent hedge against inflation and uncertainty. Interest rate cuts also support gold prices as it does not pay dividends or interest. Furthermore, central banks are actively buying gold to diversify away from US assets, contributing significantly to the price increase amidst high geopolitical risk.

Demand for gold is evident at the consumer level, with jewelers reporting people rushing to buy jewelry in advance for more cost-effective prices. The Perth Mint has seen 7,500 customers queuing weekly, often closing queues by 3:30 PM due to high volume, with many purchasing gold bars. While global demand for gold jewelry fell in the year to June, the boom is driven by gold bars, coins, and Exchange Traded Funds (ETFs), with exposure to gold ETFs tripling in the past 12 months. UBS forecasts gold to reach $4,200 by year-end and remain there through most of 2026, while Goldman Sachs tips $5,000 an ounce by December 2026. However, some, like jeweler Amiier, express concern that the rapid price increase could lead to a hard-to-recover crash, preferring a more stable market.

Independent economist Soul Slake highlighted that the investor mindset is driven by Fear of Missing Out (FOMO), particularly among retail investors, which historically can signal a market top. He views the "flight to safety" into gold as a direct vote of no confidence in the Trump administration's economic policies. Slake argues that the Trump regime has eroded confidence in US bond markets and the US dollar as a safe haven, noting that the US dollar has fallen by over 10% against major currencies since Trump's inauguration. Investors are now looking to gold and the Swiss Franc as alternatives. Concerns also include the possibility of "runaway inflation hidden by rigged official statistics," as suggested by Paul Krugman, given past actions like the sacking of the Bureau of Labor Statistics head. The greatest concern for investors, however, is the risk of President Trump undermining the independence of the US Federal Reserve, citing attempts to stack the board to force interest rate cuts. While Slake wouldn't personally predict $5,000 gold, he acknowledges it's not out of the question given the current risks to the US financial system's credibility.

Australian Housing Market: Mortgages and Retirement

A growing number of Australians are facing the reality of paying off mortgages into their 70s, raising fears that rising property prices are pushing borrowers into loans that stretch well into retirement, potentially depleting savings. Nicola Dorborn, 59, exemplifies this trend, taking on a new home loan with her son and his wife to avoid retiring with debt. Property researcher Kate Brown notes this "divide and conquer" approach is becoming common due as individuals or couples struggle with "enormous debt." Factors contributing to this include people starting careers later and the longer time required to save for a deposit.

Mortgage brokers report an increase in mid-life home borrowers (over 40). Many customers plan to sell or downsize their homes before retirement to avoid carrying mortgage debt. Economists warn that taking out loans later in life will make financing retirement more challenging. Non-bank lenders are capitalizing on this trend by offering 40-year loan terms, which many major banks no longer provide. This issue is expected to persist due to Australia's aging population and rising property market. Reserve Bank Governor Michelle Bullock denied that record low interest rates during the pandemic were solely responsible for the overheated property market, attributing the problem primarily to a "lack of supply relative to demand." National home values have climbed more than 50% since January 2020.

Australia's East Coast Gas Market Crisis

Australian manufacturers are warning that the "broken" East Coast gas market could lead to thousands of job losses and derail the government's "Future Made in Australia" policy. BlueScope Steel boss Mark Vassella states Australia is at risk of industrial decline, similar to the UK. Manufacturers report gas prices have tripled in the past decade, from $5-6 per gigajoule five years ago to around $15 now. This makes it difficult to compete with imports, leading to market share loss and the shutdown of several major manufacturers, including Oceanana Glass, Australia's only architectural glass maker, after nearly a century.

Manufacturing Australia and Mr. Vassella are advocating for a gas reservation policy and a mechanism to keep prices below $10 per gigajoule in the medium term. They argue that reserving just one-third of current East Coast gas production would be sufficient for domestic residential, commercial, industrial, and peaking generation needs. Despite years of policy interventions, gas costs have not significantly decreased; the federal government's $12 per gigajoule price cap has, in some cases, acted as a price floor, with new contracts being offered at up to $20 per gigajoule. The gas lobby supports a reservation policy only for new projects and opposes price controls, believing that increased supply is the key to sustainable price reduction. However, energy experts counter that Australia has a "gas export issue, not a gas supply issue," and new supply from fields like Narry and Beetle Basin would likely exceed $10 per gigajoule. They suggest the only way to achieve $10 per gigajoule is through additional LNG supply from Queensland exporters. Without action, manufacturers foresee "no future made in Australia."

Global Copper Supply Chain Disruptions

A catastrophic mudslide at the controversial Grasberg mine in West Papua, the world's second-largest copper mine, has sent shockwaves through global copper supply chains. Over 800,000 tons of mud fell, killing seven workers. This incident is considered the most significant supply disruption this year, with the estimated loss of production over the next 14 months equivalent to the entire output of the world's third-largest copper mine, Kahuasi in Chile.

Copper is one of the most in-demand metals globally, essential for electrification (electronics, EVs), and the "race for copper is intensifying." Copper prices on the London Metals Exchange (LME) recently saw their biggest weekly gain in a year, nudging historical highs despite concerns about industrial slowdowns. Other recent supply disruptions include flooding at Ivanhoe's Camoa Cula mine (DRC), an accident at Cadelo's El Teniente mine (Chile), and protests at Hudbay's Constantia mine (Peru). Analysts are declaring a market deficit, warning of "big trouble coming down the line" in 2-4 years due to insufficient investment in new mines. Baron Joies estimates the world needs 1 million tons of new copper production annually, but only about 0.5 million tons have been added in the last three years. Bringing large-scale projects online requires significant capital and long timeframes, potentially extending into the 2030s.

In Australia, BHP is investing $840 million to upgrade Olympic Dam, Australia's largest copper resource, aiming to double production by the middle of the next decade. Cyprium Metals also raised $80 million to reopen the Nifty copper mine in WA's Pilbara, driven by current copper prices of $9,000-$10,000 per ton, significantly higher than the $6,000-$7,000 when it went into care and maintenance. While Australia can play a role, its projects are not expected to be sufficient to fill the global supply gap, meaning Australian copper alone cannot satisfy the "insatiable hunger" for the metal in a rapidly electrifying world.

Australian Share Market Performance and Sector Insights

The Australian share market experienced a lackluster week with low volume trade, with both the ASX 200 and All Ordinaries ending down 0.3%. The perceived de-escalation of tensions in the Middle East led to a fall in oil prices (due to reduced risk of supply disruptions) and a decline in gold's appeal as investors shifted from safe-haven assets to riskier ones.

Lachlan Holloway, market strategist at Morningstar, views Australian equities as "pretty fully valued," having seen a 30% total return since June 2023, significantly higher than the typical 9-10% annual return. He highlights a concentration risk in the market, with a handful of stocks, primarily the "big four banks," driving much of this growth without an obvious fundamental reason. This skews the market towards banks and property, which investors likely already hold elsewhere. While the large-cap space is expensive, opportunities exist in smaller caps. Holloway contrasts this with the US market's concentration in "Mag Seven" tech stocks, which, despite valuation debates, have a fundamental catalyst in AI potential that Australian banks lack.

China's announcement of new controls on rare earths technologies exports had a strong positive impact on Australian-listed rare earths miners over the week. China controls approximately 60% of global rare earths supply and almost all production, making these elements crucial for defense and electrification. This move is seen as a geopolitical bargaining chip ahead of an upcoming meeting between President Xi and President Trump, prompting investors to seek non-Chinese supply sources.

Regarding GYG (Guzman y Gomez), the fast-food Mexican chain, its earnings numbers were in line with market expectations, and the company remains on track for full-year guidance. However, the stock experienced a sell-off, attributed to "a lot of optimism baked into this stock." While the franchisor business model is appealing due to its royalty-like nature and franchisees bearing capital investment, Holloway believes it's "very early in the GYG journey" to fully credit its long-term ambition of 1,000 stores in Australia and global expansion, indicating a lack of significant "margin of safety" for the share price.

Synthesis and Conclusion

The global economic landscape is characterized by significant uncertainty, driving investors towards traditional safe havens like gold, whose price surge reflects concerns over US economic policy, Federal Reserve independence, and geopolitical risks. Simultaneously, critical supply chains for essential commodities like copper are under severe strain due to disasters and underinvestment, pushing prices to historical highs amidst surging demand for electrification. Domestically, Australia faces a dual challenge: an overheated housing market forcing longer mortgage terms and impacting retirement, and a struggling manufacturing sector battling high gas prices, advocating for policy interventions like a gas reservation. The Australian share market, while having seen strong returns, exhibits concentration risk in its banking sector, lacking the fundamental drivers seen in US tech. Overall, the report paints a picture of markets grappling with complex interlinked challenges, from geopolitical tensions and monetary policy concerns to commodity supply shocks and domestic economic pressures.