It’s been another solid week for local precious metal investors, with the price of gold currently sitting north of AUD $1600oz, whilst silver is trading above AUD $21oz. Further weakness in the local currency, which at point earlier this week traded below USD $0.70 has been the major driver, with gold in USD essentially unchanged over the past 5 days.

Gold’s performance in AUD, and the role precious metals more generally have played protecting the wealth of Australian investors this year should not be understated, especially in light of what has again been a volatile trading week on the local stock market.

The ASX is again flirting with the 5,000 point marker, some 1,000 points lower than where many market forecasters predicted it would be by end 2015. Relative to the ASX, Gold in AUD has outperformed by nearly 20% YTD, no doubt one of the reasons that volumes for the yellow metal, as well as silver, have surged noticeably.

Volatility was not confined to the Australian stock market either, with oil prices jumping from below USD $40 to nearly USD $50 in just a few days, as the chart below highlights.

Whilst global issues like the continued slowdown in China are clearly impacting Australia, part of the reason for this weeks volatility in the share market, and further falls in the currency were the release of two key economic data points, our latest GDP numbers, and retail sales.

As regards GDP, whilst the official number, a 0.2% rise, was bad enough – the reality under the surface was even worse. On a per capita basis, real GDP actually fell by 0.2%, whilst real national disposable income fell by 1.2% over the quarter, and was down 2.3% for the entire year. Per capita income has now fallen close to 5% since the end of 2011, around the same time our terms of trade and prices for key commodity exports were peaking.

For those of you keen for a more detailed read into the latest Australian GDP figures, we suggest you read this excellent report from Macrobusiness.

Negative sentiment from the weaker than expected GDP result was then compounded yesterday, with the release of the latest Australian retail sales figures, which showed a decline of 0.1%, a much weaker than expected result, with most commentators thinking the number would rise by 0.3% to 0.4%.

We were not surprised by the result at all, as we think the May Budget, and the ‘Tony’s Tradies’ $20k tax write offs that the government promised were the primary reason for the jump in retail sales in June, and that that gain was always likely to prove ephemeral.

The key takeaway for local gold investors from this information is that the RBA are going to be under considerable pressure to continue cutting interest rates. We think the cash rate by 2015 will be at least 0.25% lower, and see it hitting juts 1.5% by the end of Q1 2016.

Logic suggests this will place further downside pressure on the AUD, which will benefit those of you holding physical gold and silver. On that note, we’ve seen both AMP Capital and Deutsche Bank in the news this week, calling further falls in the dollar, to as low as USD $0.60 (AMP Capital), and even USD $0.50 (Deutsche).

Were that to happen, then AUD Gold prices are headed to somewhere between $1830oz to $2200oz, whilst silver could head as high as AUD $30oz (assuming no change from current USD prices for the two metals).

Those would be significant gains for local investors, and is one of the reasons we see great merit in clients continuing to build positions in the sector now, even though the USD gold price is still facing some challenges.

As to where that could be, it’s worth noting that tonight, we have the US non farm payroll report due out – which will be closely watched, especially as the some in the market still think the Fed may end up hiking rates in September.

We for one would be very surprised if they do hike this time around, as just this week we’ve seen more evidence of how lukewarm (at best) the US economy really is. This has included

• The Dallas Fed manufacturing survey falling to -15.8 as Texas feels the pinch from the slowdown in oil and gas

• The ISM Manufacturing PMI coming in at just 51.1 – missing expectations

• The ADP employment survey coming in at just 190k jobs – again missing expectations

• Factory order growth coming in at just 0.4% - the market had expected a 0.9% result

All in all not a very strong set of numbers, and certainly not one suggestive of a robust economic recovery that can painlessly handle higher interest rates. The uncertainty the Fed may be feeling should only be exacerbated by the latest confidence survey results, with a September 1st 2015 note from Gallup highlighting that US Economic Confidence had slipped to an 11 month low.

A technical look at the market

with John Feeney

Huge daily swings of more than 2% on some of the largest equity market indexes have dominated headlines this past fortnight. The S&P 500 has been whipsawing up and down the past few days as the volatility index is at it’s highest level since 2012. Bearing this in mind, the short-term direction of stocks and hence the Gold price is somewhat uncertain at the moment.

USD Gold investors looking at the latest charts would be a little cautious. Despite the chaos in global equities the past few weeks, the rally from the USD $1,080oz could be running out of steam already. We haven’t seen an overwhelming flight to safety run into precious metals, as most punters still believe in the Fed and see the recent sell off in equities as a short-term correction, and expect the bull market in stocks to continue.

If we take a look at the US daily gold chart below, we can see the rally since the start of August may have topped out at USD $1,160oz. The MACD in the daily chart is yet to signal a short-term sell sign, but is very close to indicating that momentum could turn, whilst RSI is also declining.

The moving averages are still in bearish alignment, and we would need to see a large volume positive day with the price pushing past USD $1,140oz to have more faith that the market will move meaningfully higher.

On the longer-term weekly chart, gold looks to be a fairly neutral. We did in fact have a bounce off support, which sat around USD $1,080oz, though a re-test of this level could be on the cards. If we see gold re-test and hold that level, it could well be a double bottom, which would be encouraging.

So, nothing concrete on US gold direction at the moment with some weakness potentially on the cards short-term. It is however more important for AUD investors to watch our currency closely as discussed before, as the potential for a meaningful decline in the dollar can’t be ruled out, and will propel domestic precious metal prices higher.

Coin Sales Up as Miners go to Pot

In the last couple of weeks, ABC Bullion has been inundated with orders for popular silver coins like Canadian Maple Leafs. This is clearly something of a global phenomenon with the US Mint’s website reporting that some 101,500 ounces of American Eagle gold coins were sold in August, a fairly stunning rise from the 25,000 ounces sold in August 2014.

We’ve also seen a stabilisation in gold ETF holdings the past week or so, though they remain back below GFC levels.

We wanted to mention one final comment re the gold sector before wrapping up this weeks update. We’ve written often in the last few weeks about how hedge fund positioning and media headlines about gold (both of which reek of extreme pessimism) are actually a great buying signal for long term investors, but this week we wanted to share another sign that the market is likely close to bottoming.

And that sign came from an article in Reuters business news (attached here as a link) that highlighted the fact that many operators in the junior mining industry and giving up on mineral exploration, and turning to alternate businesses like egg exporting and medical marijuana farming.

This is almost a carbon copy of what happened in the late 1990s, when many junior mining companies turned to the technology sector, before the Dot.com bubble burst with a crashing NASDAQ.

Of course, that also happened to be the exact bottom of the precious metal market, with investors earning many multiples of invested capital in the coming years.

We won’t be surprised to see history repeat

Until Next Week

Disclaimer

This publication is for education purposes only and should not be considered either general of 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, 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.