AUD Rallies as Bitcoin turns Ten!

Precious metal prices have recovered from their correction earlier in the week, with gold currently sitting at USD $1,234oz, whilst silver last traded at USD $14.84oz.

The moves cap what has been a great month for gold in particular, with the yellow metal up by over 2.3% in USD terms for October. Silver was essentially flat, with the Gold to Silver Ratio (GSR) increasing from 83:1 to 85:1 during this timeframe.

Whilst steady in USD terms this week, the metals have pulled back in Australian dollars, owing to a sharp rally in the value of the AUD, which has pushed back above USD $0.72 this week, as stronger than expected export data, a move higher in risk assets, and short covering supported the local currency.

The AUD has rallied by over 2.5% in the last week versus the USD, with the following chart suggesting the downward trend in the AUD, which has been falling for almost nine months, may be breaking.
 

Source: Bloomberg

Short-term, a continuation of the rally in the AUD will put downward pressure on local gold and silver prices, though with Australian house prices continuing to slide, and a handful of other headwinds facing the domestic economy, downside pressure on the local currency will remain.

Escalating fears over a trade war between China and the United States are just one of those headwinds Australia faces, with JPM economist Sally Auld this week pointing out that Australia will find it difficult to “duck and weave” the next global slowdown, especially given our reliance on exports to China (and Japan), which can be seen clearly in the chart in the chart below.
 

Source: Bloomberg

The only caveat to our broadly bearish position on the Australian dollar is the massive short position in the currency, and the fact it has stubbornly held its ground just above USD $0.70 over the last month.

Should the USD move lower, and AUD shorts feel pressured to cover their positions, then we could see the local currency move higher, which may push gold back below AUD $1,700oz, and silver below AUD $20oz in the short-term.

We’d be treating that as a buying opportunity personally, particularly for silver given how far it has fallen in recent years, and how elevated the GSR is at present.

In other gold related news, this week, the World Gold Council released their Q3 2018 gold demand trends report. As always, the report was full of nuggets (pun intended) with some key takeaways including:

• A 28% jump in bar and coin demand, which speaks to the reawakening of investor interest in the sector, with Chinese demand alone up 25% year on year.

• A 22% jump in central bank demand to 148.4 tonnes, as emerging market nations continue to build up their gold reserves, increasingly recognising it as a key part of their foreign exchange holdings.

• Over 100 tonnes of gold flowed out of ETF products outflows, led by investors in North America, who were happy to chase equity markets higher in Q3.

That last point is perhaps the most relevant, as those chasing equity markets higher ran smack back into the huge correction we’ve seen in October, with many equity markets now seeing negative returns on a YTD basis.

That includes the local ASX 200 (chart below), which has fallen from over 6,350 points in late August to just 5,832 points today, with the majority of the fall taking place last month.

Indeed, according to a recent Deutsche Bank update, 89% of asset classes they track globally are now declining on a year-to-date basis, the highest number on record since 1901. This can be seen in the chart below, which shows returns for all asset classes denominated in USD, as well as in local currency terms.
 

The uncertainty that has crept back into traditional asset markets will no doubt continue to bolster demand for gold, with the market set up nicely to continue its strong run of performance heading into Christmas. Latest data from the US Mint supports this notion, with October sales up nearly 10% for the month.

Confidence in the outlook for the yellow metal is seen across large parts of the industry, with a poll of delegates at the just completed LBMA conference seeing the gold price moving back above USD $1,500oz within the next 12 months.

We are bullish, even if we wouldn’t go so far as to call for a 20% rally in one year from these levels, though there are a handful of catalysts that could see the metal move that decisively.

Bitcoin Turns Ten

This week marks exactly 10 years since Satoshi Nakamoto launched Bitcoin, with the price currently sitting just below USD $6,400 per coin according to coinmarketcap.com.

The chart below plots the price of the coin over the last 2 years, with the surge in prices from below USD $1,000 to USD $20,000 per coin in 2017, as well as the 70% correction in 2018, both evident.
 

Coincidentally, November marks 1 year since we released our detailed research paper; “Bitcoin, Dolllars, Gold: What is the Future of Money”, which looked at the tailwinds and headwinds for Bitcoin and cryptocurrencies as a whole, as well as comparisons with gold.

If you’d to read that report in detail, you can access it here.

The “battle” between Gold and Bitcoin was also a subject I discussed this week at the IMARC conference in Melbourne, which was attended by thousands of mining industry executives.

In my talk there, I looked at the supposed “selling points” of Bitcoin, and why most if not all of them are flawed. These selling points include the assertions that Bitcoin is anonymous (it’s not), efficient to use (it’s actually slow and expensive), and decentralized, when in reality ownership of Bitcoin, and control of Bitcoin mining is incredibly concentrated.

Bitcoin also doesn’t remove intermediaries in practice, as trading it via an exchange required the use of third parties, many of whom are unregulated private businesses with minimal history and questionable governance.

Finally, we pointed out that the whole concept of Bitcoin having a fixed supply is questionable (given the fact Bitcoin can be ‘forked’), and that more importantly, even if it were true, it would almost guarantee that it IS NOT SUITABLE as a monetary medium, as the key to an enduring monetary medium is stable, not fixed supply.

Despite our scepticism about Bitcoin, and cryptocurrencies, there is still clearly an emerging appetite for blockchain technologies, though this is fundamentally different to the argument that Bitcoin will replace fiat currencies as we currently know them.

From an investment perspective, our view remains unchanged from a year ago – we can understand why people may want to speculate with a small portion of their capital, but the risks shouldn't be underestimated.

It might be marketed as digital gold, but it is nothing of the sort.

Until next time,

Jordan Eliseo
Chief Economist
ABC Bullion

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