Fairy Tale Budget

Precious Metals Commentary

Precious metals stabilised this week in USD after the sharp decline last Thursday night that would have triggered cascading stop losses, as gold failed to hold above $1,300. Gold is trading at USD$1,293.50 at time of writing and silver remains at USD$15.16, so little changed from last Friday’s update.

Gold struggled to make any ground this week as it was weighed down by a firmer dollar and higher regional equity markets, although we seem to be consolidating at these levels after holding above the 100 day moving average, as mixed data is being released out of the US.
 

 
 
The AUD provided somewhat of a gift for local investors this week as we saw some temporary strength back above USD0.71 cents leading to the lowest PM prices since February, with gold touching $1,808 briefly before bouncing back to AUD$1,820 and silver a low $21.48 per ounce.

For the past few weeks, we talked about the short palladium / long platinum trade being ‘in play’ and that is indeed what we have seen play out. We covered the severe sell-off in palladium last week and the chart of the week this week goes to platinum, which appears to be staging a breakout, pushing back towards USD$900 after trading close to ten-year lows. Expect this to be the start of the PLAT/PALL ratio coming back to more reasonable levels. Since Jan 1st 2019, platinum is up 13.5% in US dollars as it started the year as one of the most hated commodities on the planet.
 

Fairy Tale Budget

So another budget delivered. Shae Russell from the Daily Reckoning sums up our feelings about it: “Did I watch it? Nope. Late into the evening, I read a few snippets. They were full of the fairy tales I was expecting.” Does anyone ever take the government estimates of budget surplus or economic growth into the future seriously?

Although that is not just us, as commentators noticed that there wasn’t much stimulus in the budget (probably a good thing, let’s not encourage politicians to spend other people’s money) and the market agreed as the Australian dollar did move much on the budget’s release.

Maybe the market doesn’t see the point of getting worked up as pundits see a Federal election being held in May and if Labor get in then it is a whole different ball game.

Tim Lawless (CoreLogic) sees uncertainty around the election outcome as “plaguing” the housing market in addition to weak domestic economic conditions and tightening lending policies, but he did note that “the pace of falls slowing month-on-month”.

With Australian housing credit growth as at February the weakest level on record, the falls will still continue as “changes in housing credit growth tend to lead home prices by around six months”. Australia’s declining personal credit supports this poor outlook.

The situation overseas isn’t any better, with international trade volumes reported as negative year-over-year for the first time since the great recession. The chart below from financial advisors Alhambra Investments demonstrates this where in China, industrial production has reached new lows. Alhambra feels that commentators calling the PMI just poking above 50 as a “green shoot” are “making the same mistake(s) as early 2012 … dismiss[ing] the eruption of global market and money chaos” which they see building yet again.
 

US isn’t looking any better with Alhambra noting that US retail sales growth is also declining.

Glass Houses and Crypto

It is funny how the internet throws up coincidences, and we had one last week when, just after reading a Bank of England article discussing crypto stablecoins, we saw the headline “Turkish Lira Plummets As Central Bank Burns Through A Third Of Its Reserves”.

How are those two topics related?

Well, the gist of the Bank of England article is that it is unlikely that algorithmic stablecoins will work in the long run. The reason given is that, notwithstanding the fancy programming code, such crypto coins are “heavily dependent on investor belief and confidence … if some users start to lose confidence and sell, the coin risks falling into a downward spiral”.

The Turkish Lira seemed to be in a downward spiral as it attempted to support its currency ahead of local elections. Think tank Eurasia Future argues that Turkey should consider a shift to a traditional gold standard as that may be a solution to dealing with foreign currency speculators.

But maybe such issues don’t apply to major currencies like the US dollar?

If so, then why do central banks employ large numbers of economists to develop models (algorithms of a sort) of the economy to work out the correct amount of tweaking to interest rates and other policies to meet their targets, of which inflation is a primary one.

As the Reserve Bank of Australia says, “controlling inflation preserves the value of money” and they also hold balances of other currencies (and gold) as reserves in case they need to “enter the foreign exchange market to address disorderly market conditions or gross misalignments of the value of the Australian dollar”.

We’d say that sounds a bit like maintaining “belief and confidence”.

The Bank of England is probably right to conclude that stablecoins are unlikely to replace national currencies any time soon, but maybe they should be careful throwing crypto stones when they live in a fiat glass house.

Google Goes Gold

While we are talking about potential competitors to fiat currencies, they don’t come any bigger than Google. Indian newspaper The Economic Times noted that Google Play had updated its terms of service to include the mention of the “offer the sale, delivery and repurchase of Gold and other related services”.

Such digital gold services are offered by a number of other providers in India, which should not be a surprise given that country’s affinity to gold and use of it as a form of saving and payment.

At this time it just appears to be a local initiative and there is no indication that Google Pay is looking to offer digital gold accounts outside of India. You can rest easy, Bank of England, at least for the moment.

Yield Curve

Last week, we mentioned how chatter about yield curve inversion was an indicator of market skittishness. The chart below, from Chris Weston (Head of Research at Pepperstone) shows the inversion in orange against number of mentions of “yield curve” in articles.
 

As the chart shows, there was hardly any mentions when the curve inverted (10yr – 3m spread went below zero) twice before but this time the interest in the topic explodes. Skittishness indeed.

Gold Price Forecast

The market has cause to be hyper sensitive, with respected precious metals consultancy Metals Focus seeing gold being supported in 2019 by slowing global economic growth and “Brexit, political instability in the U.S., Middle Eastern tensions, and stalling North Korea denuclearization efforts”.

Unlike many analysts, Metals Focus are specific with their forecast as indicated in the chart below.
 

Conservative, yes, but a lot more realistic than the “gold to $10,000” calls that appear regularly. Metals Focus sees most of the action happening towards the end of 2019, but with those wide high and low ranges, the smart play may be to dollar cost average for now.

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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