Buffett Buys Barrick

Precious Metals Commentary

Gold failed to hold above US$2,000 once again this week and has put in a lower high before retreating to $1,950. Gold took a hit, and silver lost 3%, on Tuesday following the Federal Reserve meeting minutes indicating that the Fed committee pushed back on the idea of capping bond yields.

The question on most investors’ minds is how low gold will go in the short term? We think it is significant that gold found support above $1,900 and is trading just above the previous all-time high in 2011 through which is broke out dramatically last month.

Gold’s long-term weekly chart below shows the importance of the 2011 high and that the recent month’s price action is part of a two-year long bull market.

Zooming in on gold’s daily chart below we can see the level of the previous 2011 high as well as a short-term trend line that gold has respected so far. A break south of this level could see a more significant pull back into the $1,800 range, so we are watching in anticipation.

We expect gold to make a low when we start hearing stories about a ‘false break-out’, so we might have room left in this short-term correction.

ABC Bullion Global General Manager Nick Frappell feels that gold's drop was less about the Fed minutes and more that after reaching very high valuations, both fixed income markets and gold were overdue for a correction. He sees resistance at $2,070 & $2,115 with support at $1,909 from the weekly Turning line and deep support at $1,764.

With the Australian dollar trending sideways, local gold and silver prices have been following US price moves. Australian gold is consolidating around $2,700, at which it spent most of its time earlier this year. Nick says support is at $2,626.

Silver is just below A$38 (around $27 in US terms) with the gold:silver ratio taking a breather at 71, a far more reasonable level at which it spent a lot of time around back in 2015/2016. Nick says silver has support at $26.36 and then $24.40.

Regarding silver, CPM Group noted that “silver in fact almost always but not always out-performs gold during a gold bull market” due to a smaller market size and relatively lower liquidity but did warn that it is a high risk-high return asset - outperforming gold on the upside but also experiencing sharper drawdowns.

Buffett Buys Barrick

Those only paying scant attention to news headlines would have though Warren Buffett had recanted his famously negative view on gold as the goldbug commentators hyped up Berkshire Hathaway’s $565 million purchase of Barrick Gold (ticker GOLD) by implying he had bought gold.

While Buffett hasn’t bought gold directly, and the Barrick allocation was less than 0.5% of its overall holdings, it is still a positive development in that it reflects a view that gold price will remain strong and allow miners to continue to generate good cashflow and pay dividends.

The move also sends another signal that the smart money is moving into gold, giving it respectability to a wider audience – just look at this chart of search trends on the word “Barrick” – that is the power of the Buffett brand.

More interesting is that in the quarter that Berkshire bought Barrick, it dumped airline stocks and sold down on financials including Goldman Sachs, Wells Fargo and JPMorgan Chase.

Australian financials are also looking shaky, with Westpac deciding to axe its dividend for the first time in decades based on a “highly uncertain” economic outlook, following ANZ who did the same some months ago. No surprise considering this chart from Westpac’s quarterly update.

Those percentages don’t look too bad but journalist Tarric Brooker noted that if Australia used the same delinquency definition as the US (whose mortgage delinquencies hit 8.22%), then Australia’s true mortgage delinquency rate would be around 11.2%.

Gold Bubble? What About the Stocks Bubble

The most absurd stock market bubble in history in our opinion continues to amaze with Tesla trading above $2,000 this week, putting its market cap in reach of $400 billion.

Apple moved up through $470, just hitting an astonishing $2 trillion valuation. Not that that matters in 2020 as valuations have apparently become meaningless.

While everyone focuses on the big name stocks, the stocks bull market is on weak grounds with this chart via John Mauldin showing that pretty much all of the S&P 500’s returns are coming from only ten companies: Microsoft, Apple, Amazon, Google, Facebook, Visa, Mastercard, Nvidia, Netflix, and Adobe.

It is not a good sign when a stock market has ten companies up 35% since the beginning of the year but its remaining 490 are down more than 10%.

US fund manager Hussman says that they “expect that the entire S&P 500 total return since 2000 will be wiped out” and lose about two-thirds of its value based on their estimated forward return model. Commenting on low interest rates as central bank “price control”, they dismiss claims by bulls that current “extreme stock market valuations are ‘justified’ by low interest rates is like saying that poking yourself in the eye is ‘justified’ by smashing your thumb with a hammer”.

We will close our (now) regular low interest rates rant with this quote from a Reuters opinion piece which observes that by playing around with interest rates, central banks are messing with the price of time:

“If you set the clock – the tempo of capitalism – to run backwards, the normal order of things breaks down: companies turn into zombies, herds of unicorns appear, investment discipline disappears. Wealth becomes virtual. Inequality is unleashed. Society melts down, markets melt up.”

A fear of society melting down and “becoming a Marxist society” is behind best-selling author of “Rich Dad Poor Dad” Robert Kiyosaki, preparing for leaving the US, saying that he “started storing gold in Switzerland and in Singapore, so in case I had to run, plus I had different passports”.

As to whether gold is in a bubble (or has reached its bubble top), John Deniz, of Australian fund manager Paragon, says that there are a number of drivers for gold strength to continue and that taking a historical view, “the biggest gold bull cycles (in pink below) occurred when US real rates went negative”.

He says that the current gold cycle (in yellow) “continues to boast strong upside risk”.
 
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.

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