2019 in Review

With the end of 2019 quickly approaching we wish all of our clients and readers a happy holiday period and we thank you for your business and continued support throughout what was a great year for precious metals. For this update we will take a look back at 2019 across various financial markets, covering a very interesting calendar year, which in summary was the year to dump currencies and to buy everything. To start we have a snapshot of year-to-date performance across various asset classes and the only loser in our list is the AUD/USD.

Gains in almost all asset classes had more to do with monetary policy than economic fundamentals, as global growth ticked along at low digits, inflation by measure of the CPI barely registering, but central banks had a mandate to continue easing monetary policy and injecting further stimulus.

A Phenomenal Year

Bitcoin is the standout on the list above; having bottomed in February 2019 is up over 94% from the lows. So if you were lucky enough to pick the bottom at the start of the year and HODL’ed through you would have been rewarded. But this would have had to be a short-term trading opportunity bearing in mind the fact that Bitcoin remains 65% off the peak after experiencing an echo bubble that failed to reach new all-time highs. Gold in AUD terms traded up through all-time highs as did Palladium and US stocks.
 

Gold Goes Gangbusters

Gold in AUD terms had a great year gaining 18% and we at ABC Bullion experienced phenomenal growth in both accounts opened and transaction volume. We are not quite at the end of the year, but already year to date we have seen an increase in physical bullion demand of circa 76% growth on 2018. Which makes sense given the RBA’s stance on monetary policy and the absolutely dismal returns that cash deposits are experiencing.

Back on 31 May we made a call for AUD $2,000 gold on the basis of Westpac forecasts for a 66-cent Australian dollar with three scenarios based on different US gold prices by year-end. Gold actually overshot our target and surprised even us a little this year, hitting highs over $2,300.

In this May market update we plotted the three scenarios on the chart below, and we were of the mindset that we should finish 2019 somewhere over $2,000 AUD. In hindsight it all happened a lot faster than we expected with AUD gold clearing $2,000 within a month of that report which would have caught a lot of investors by surprise too.

Looking back, we have plotted gold’s actual performance since then and we are finishing the year very close to our more bullish target with gold going even a bit off the chart during the peak. At the time it was an aggressive call given gold had been capped at $1,375 under multi-year resistance, but a month later gold broke through and as you can see from the chart it put those scenarios in the shade.

In the short term, we are watching the below level with anticipation as the next technical signal that a new uptrend is in place. Gold needing to break out of the range highlighted to signal the next leg higher.

Palladium Power

Back on January 11th we noted that palladium had broken out to a (then) new high of $1,322. We said it was “looking a bit bubbly” and “a tad overbought”. While the white metal made an impressive run over the next few months, we stuck to our assessment that palladium was a volatile speculative assets and gave a “proceed with caution” recommendation on 22 March as it initially corrected from a $1,613.90 high and then subsequently dropped 20%.

Palladium sea-sawed for the next 6 months and although it then turned on the booster rockets to spike to $2,000 only a few days ago, we still caution trading it, especially given palladium attracts 10% GST. Platinum to us looks much more undervalued.

Monetary Policy World Map

The two maps below indicate a summary of Central Bank action in 2019 and the reported inflation numbers by country. Firstly, we can see that the vast majority of the planet saw policy rate cuts or interest rates remaining the same, with only a few central banks increasing rates in 2019. If this continues, pretty quickly we will start heading into negative territory and we already have had Central Banks talking up the benefit of negative rates this year.

One of the main reasons for Central Bank easing has been the apparent absence of inflation by measure of the official CPI. We can see in the world map below, most of the developed world has next-to-no inflation, which is encouraging central banks to collectively ease policy – resulting in asset price appreciation across the board as investors are pushed higher up the risk spectrum in the hunt for yield.

Whether by design or by incompetence the end result is the same, and that is the rich get richer from higher asset prices and the poor clearly aren’t doing too well if there is no velocity of the broader monetary supply, as the new money creation simply does not trickle down them.
Of those countries that do have inflation, Venezuela stands out like a sore thumb and in complete crisis, with inflation levels over 10,000% but another getting more than what they wish for is Argentina with over 53% inflation in 2019. Central banks should beware of what they wish for.

(Source: https://www.imf.org/external/datamapper/PCPIPCH@WEO/WEOWORLD/VEN)

US Stocks Remain Expensive

One common measure of market valuation is the Shiller P/E index, which looks at the overall markets price over earnings on a seasonally adjusted basis. There are only two other times in history when stocks were more expensive relative to earnings by this measure and those were during 1929 stock market bubble and the dotcom bubble of 1999. Although it may have been irrational exuberance driving the previous bubbles, this time we arrive here largely in part by excessively low interest rates to historical levels.

Today the S&P500 Shiller P/E index is 80% higher than the historical mean of 17x and has an implied future annual return of -2.2%.

(Source: https://www.gurufocus.com/shiller-PE.php)

Housing

The Australian housing market faced a lot of headwinds this year:

• China capital controls

• Heightened lending standards post Royal Commission

• Interest only loans rolling into P&I

• Overdevelopment during the peak

and the trajectory looked bad early in the year with price declines accelerating.

Housing markets got some boost from the RBA cutting interest rates in half over 2019 and backtracking by the regulators on prudential standards and the result was the beginning of a recovery.

Having said that, we note that homes are still down from their peaks, with Sydney down 8% and Melbourne 3.7%. Those are minor compared to the mining bust hit Perth which is still down 21.3% and Darwin off a massive 31.5%.

The big question for 2020 is whether house prices can continue their revival in the face of growing mortgage stress and high debt to income ratios (see chart below).

Most countries have seen household debt levels moderate but Australia is still in #2 position globally, according to the International Monetary Fund, with the chart below showing those with debt to GDP ratios above 100.

Second to this is a chart of Australian household debt as a percentage of income, which has risen to over 200% in 2019. Australian housing debt is at absolute nosebleed levels as neither the US housing bubble nor the Spanish were anywhere near this high at the peak of the market in 2007.

The employment market also isn’t as great as the ABS would like us to believe, with Roy Morgan’s under-employment & unemployment figures of 16.1% highlighting how many are doing it tough.

Those with money to save have become more concerned and trend we noted at the start of the year of increasing numbers of first time precious metals investors opening accounts with ABC Bullion continued throughout 2019.

Globally, precious metal prices were supported by a number of geopolitical risks, such as:

• Escalating Indian-Pakistani tensions

• US-China trade war

• Two oil tankers being attacked by torpedoes in the Sea of Oman

• Protests in Hong Kong and talk of Chinese troops mobilising on the border

• Continuing saga that is Brexit

While some of those risk have moderated, which has resulted in metal prices moving sideways over the last few months, major risks remain. In our view, the spike in repo rates and subsequent return to (“In no sense is this QE”) QE by the US Fed, is probably the best indicator that below the surface everything is not well.

As we said back in February, a pause in this tightening in an attempt to reflate the economy will lead to a weakening USD and a disintegration of confidence in the Federal Reserve, which will be good for gold.

A Global Case for Gold

In August 2019, we held our National Conference on a Global Case for Gold. Jim Rickards told the 620 attendees that the following five forces would drive the price of gold considerably higher:

1. the dynamics of the current secular bull market

2. the role of real rates

3. conventional supply and demand drivers

4. geopolitics and financial warfare considerations

5. potential for monetary reset or reform

Mr Rickards said that in a monetary reset gold would need to revalued to circa $10,000 to get money supply back to the 40% backing it used to have. He said gold was still the best port in a financial storm and that the new bull market had many years still yet to run.

Miner Merger Mania

Back in March we noted that gold miner merger activity was picking up, with Barrick’s acquisition of Randgold followed by their hostile bid for Newmont (while Newmont was working to close its deal for Goldcorp).

At the time, Mining.com said that a fresh wave of buyouts would be imminent” with Northern Star Resources and Evolution Mining as being potential buyers. That turned out to be the case, with the following deals happening towards the end of the year:

• Evolution bought Newmont’s Red Lake gold complex

• Northern Star bought Newmont’s 50% share in Kalgoorlie Consolidated Gold Mines

• Saracen bought Barrick Gold’s 50% share in Kalgoorlie Consolidated Gold Mines

• Kirkland Lake bought Detour Gold

Frank Homes of U.S. Global Investors said that merger activity is good news for investors in physical gold as it historically has been a sign that gold is nearing a bottom.

Gold’s action in the second half of the year certainly proved Frank’s point, with the ASX gold equities really kicking off as gold broke out.

While the index corrected from its 59.7% peak at 8730, demonstrating the adage that gold equities are a leveraged play on gold, it still posted a 15.4% gain for year.

We wish everyone a successful year in 2020 and happy New Year!
 
Until next time,

John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.

Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.