Buying Opportunity as Gold Slips Below AUD $1,700 per Ounce!

Precious metal prices for local investors have eased this week, as a bounce in the value of the Australian dollar helped pushed gold down toward AUD $1,686oz, whilst silver is at AUD $20.04oz.

Prices in USD have also corrected – gold was last trading at USD $1,224oz, with silver at USD $14.55oz, as the metals remain within their recent trading ranges.

Last week, we commented on the potential for gold to head below AUD $1,700oz in the short-term, stating that whilst we are bearish in the medium-term on the Australian dollar; “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.”
 
This is exactly what has played out this week, with the US mid-term election results (which the markets largely predicted, although there was no “blue wave” uprising), and a covering of AUD short positions helping propel the local currency back up above USD $0.725.

Whilst we could see prices ease a little further short-term, we’re already happy enough with this pullback, as gold was over AUD $1,740oz just two weeks ago. As such, we will personally add to our holdings at current levels, using both our SMSF account, as well as our ABC Bullion Gold Saver.

Ray Dalio on Financial Markets and Gold

We are always interested in the views of market professionals when it comes to gold, as well as other asset classes, including those who take a pessimistic view on the outlook for gold and silver.

This week however we are pleased to see articles which reference a recent interview with Ray Dalio, founder of Bridgewater, arguably the world’s largest and most successful hedge fund.
Dalio has long been noted as a gold “believer” (i.e. someone that understands and appreciates the value of gold, and its potential role in a portfolio), and this belief was something he re-iterated in a recent interview, which you can access here.

In the interview, Dalio stated that investors should have anywhere between 5% and 10% of their wealth in gold, with it likely making sense to be near the upper end of that range, given we are ‘late cycle’.

The World Gold Council Launches Gold Hub

As regular readers of ABC Bullion market updates will know, we are big fans of the data and research that the World Gold Council produce. This week they’ve launched a particularly interesting initiative called “Gold Hub”, accessible here: https://www.gold.org/goldhub

For anyone interested in precious metal markets and investments, Gold Hub looks like it will be a crucial resource, with the site containing information of supply and demand factors for the yellow metal, as well as ETF data, central bank reserves and importantly, performance analytics, which will look at how gold can improve portfolio returns and minimise risk.

As the section on “Gold as an Asset Class” highlights, gold plays four fundamental roles in a portfolio, offering:

• Diversification and loss minimisation in times of market stress

• A strong source of long term returns

• Liquidity and the complete absence of credit risk

All of these factors combine such that gold offers a means to enhance overall performance, with analytics of portfolio returns in USD, EUR, GBP and just as importantly, Australian Dollars, all highlighting the benefits of investing in gold.

To add to this, Gold Hub also includes a wonderful portfolio simulator, which allows one to build a portfolio “from the ground up”, adding whichever asset classes you like.

It’s worth a visit for those interested in these markets.

Central Bank Gold Reserves

It seems every week there is more news about the increase in gold reserves that we are seeing at a central bank level. This chart, which comes from a Kitco article dated 2nd November, highlights the major buyers this year, with central bank buying likely to hit 450 tonnes in 2018, according to analysis by Metals Focus.

 
Not only is the total volume of gold being bought increasing, but the spread of buyers continues to grow, with over 15 central banks adding to their reserves since the start of 2017.

Collectively, central banks now own more than 33,000 tonnes of gold, almost 20% of all the gold that has ever been mined, with the number only likely to increase in the years ahead, given the myriad unresolved issues in financial markets, and rising geopolitical risks.

In other central bank gold news, the Reserve Bank of Australia recently released an update on Australia’s 80 tonnes of gold reserves, which you can access here.

The RBA, who are amongst the most transparent of central banks when it comes to discussing their gold reserves, have included a lot of information on the holdings, including the tonnage of gold they’ve had on loan over the years, and the types of income one can generate from said loans, which you can see in the following two charts.

 
As you can see, at the turn of the century, the RBA had almost 80 tonnes of gold on loan – essentially their entire holdings after the major sale they made in the late 1990s. Today that number has been cut to just 11 tonnes, or about 14% of total holdings.

This next chart is particularly useful, as it gives a good understanding of the type of interest rate one might expect the RBA to earn on any gold loans. As the RBA update itself states;

“A common way to gauge gold lending rates is to use the rates quoted on gold swaps against US dollars. Until 2015, the LBMA published Gold Forward Offered Rates (GOFO) that represented interest rates at which market participants would borrow US dollar cash in exchange for lending gold. Graph 2 shows the difference between GOFO (a secured US dollar interest rate) and the rate at which US dollar cash could be borrowed on an unsecured basis in the interbank market (LIBOR). The difference approximates the rate a market participant might expect for lending gold without receiving cash or any other form of security. As noted above, the Reserve Bank does not lend gold on an unsecured basis. Consequently, the gold lending rates derived in Graph 2 will generally exceed those available to the RBA.”

As you can see, gold loans today will be lucky to generate even 15-20bps of income, so the RBA earning $710,000 on loans of 11 tonnes of gold is about what you’d expect, an important clarification given some commentators were suggesting the RBA (and in effect the Aussie taxpayer) were being short-changed on the income generated, using US 10 year bond yields as a (in this case misleading) comparator.

Australia: Why the RBA Will Cut Interest Rates Next Year

This week we listened to the latest Money Café podcast between two of Australia’s heavyweight financial journalists, Alan Kohler and James Kirby, which you can access here.

They commented on a range of issues, including the property market, and the call from AMP Capital’s Chief Economist Shane Oliver that Sydney and Melbourne property prices will fall by 20% from peak to trough.
 
Given the falls over the last year, this would imply Sydney has around another 12% to fall, whilst Melbourne prices will need to come off another 15%, based on Core Logic data looking at existing declines from recent peaks.
 
The RBA is not overly concerned, still predicting an uptick in GDP growth, and a fall in unemployment to below 5%, but as Alan Kohler stated, if a decline of 20% (or anything approaching that) occurs in Australia’s two largest and most important property markets, then it's a near certainty the RBA will end up having to cut interest rates.
 
On the subject of property markets, we read with interest the latest blog from respected property analyst Pete Wargent, discussing the impact of Labor’s proposed changes to negative gearing.

Back in March of 2016, we wrote a piece titled “Negative Gearing – Let Sleeping Dogs Lie”, where we discussed several potential problems with changing negative gearing laws, including the fact that:

• Grandfathering is unfair

• Limiting negative gearing to new builds would be fraught with danger

• It would hurt a lot of low to middle income Australians

• Problems could be pushed elsewhere.

Pete’s more up-to-date blog, which you can access here, addresses some of these issues (especially the problem of encouraging investors to purchase new builds), but even more importantly, it highlights the not insignificant issue that the Labor policy will not do much (if anything) to limit the tax breaks available to ultra-wealthy investors, but IT WILL negatively impact Mum and Dad investors.

Until next time.
Jordan Eliseo

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