After running up to the USD $1220oz level at one point last week, the gold price eased back, with the yellow metal settling in around the USD $1180-USD$1185oz range earlier this week.

Overnight we saw a decent rally, with gold again back above USD $1200oz, as another set of disappointing US economic data had short investors scrambling for cover in the lead in to this Friday’s non-farm payrolls report.

The latest price action caps off another frustrating start to the year for USD gold investors. After racing up to and temporarily above the USD $1300oz mark in late January, the market has largely been in retreat, crashing below USD $1150oz by mid March.

Weakness in the AUD has meant that the returns for domestic investors have been far more favourable, with the AUD gold price return circa 9% for Q1, whilst silver has rallied by 17%, a great return over just 3 months.

Euro and British investors have also done well in bullion these past 3 months, with prices up 11% and 5% respectively in Q1

The price action isn’t entirely surprising in light of the confusing data we’re getting regarding the US economy, and the confusing lead from the Fed.

As to the former, with the exception of payrolls, US data has been overwhelmingly weak this year. Retail sales, durables, personal spending, industrial production and the like have all disappointed, yet payroll growth has been strong. Make no mistake, the quality of the jobs being created is also poor, but the market usually just pays attention to the headline, and the headlines on the employment front, including a falling unemployment rate continues to impress.

But the better than expected payroll data can’t hide the clear deterioration in US economic data. If we look at the Bloomberg Economic Surprise Index for the US, we can it’s almost back to early 2009 lows, which, if past is prologue, would suggest sharply declining US growth (if not a recession).

This is something the Atlanta Fed projections would also indicate, with current Q1 growth forecast to be 0.0%. That is right, the Atlanta Fed is now predicting the US economy didn’t grow at all in Q1 this year.

Two months ago, they thought the number would be over 2%. You can see how their projections have declined over that period in the image below, with the Atlanta Fed GDPNOW forecast the one to look at.

As to the Fed itself, and its view on interest rates, officially they’re no longer ‘patient’, yet they’re still clearly dovish. Many market participants are now expecting any Fed rate hike to be delayed to September 2015 at the earliest, whilst the more bearish analysts don’t think we’ll see any hikes until 2016, with QE4 a possibility too.

As to how this affects gold, it depends on what time frame we’re looking at.

Obviously, long term I’m a secular bull, as I think in the coming years there will be an eventual realisation that there is no easy way out from the 50 year credit binge we’ve been on in the developed world, and that the free lunch central banks are trying to give us actually has a price tag.

When that happens, it is only natural that investors will increase their allocations to the asset at the bottom of Exeter’s pyramid.

Short-term (an area that is not my forte), with CFTC positioning showing huge net short positions for speculators, I think we might see another run back toward USD $1220oz range.

Indeed yesterday I posted commentary on news site Livewire predicting some short term strength leading into this weeks payrolls report.

Obviously if the next set of job numbers are again in the vicinity of 300,000 jobs then we’ll see gold fall back again, but without that it wouldn’t surprise me to see gold head into the Easter weekend above USD $1200oz.

Years of QE – To the Wealthy go the Spoils

Several years into this Quantitative Easing experiment, it is becoming increasingly evident that the overwhelming beneficiaries of cheap money are those who own financial assets and property.

Indeed, in a great research piece titled Profits without Prosperity, William Lazonick, professor of economics at the University of Massachusetts Lowell, noted that “corporate profitability is not translating into wide-spread economic prosperity”. He also noted that “five years after the end of the Great Recession, corporate profits are high and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.01% of income recipients – which include most of the highest-ranking corporate executives-reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid.”

This week, courtesy of a report we read from Mauldin Economics, we saw another expression of this growing ‘wealth divide’. The chart below plots the changes of the S&P500 index and the S&P Global Luxury Index, both rebased to 100 in March of 2009, when markets bottomed.

The chart below plots the changes of the S&P500 index and the S&P Global Luxury Index, both rebased to 100 in March of 2009, when markets bottomed.

Now to be fair, the article that this came from actually attributed this discrepancy to the emergence of ‘label-conscious’ consumers in Asia, who are growing their disposable incomes and are willing to spend it.

No doubt the author, Tony Sagami, is correct on that front, and his article also included a great chart from the Economist showing growing sales in the Chinese luxury good market.

But there’s also no doubt in my mind that the discrepancy we’ve seen between the broader stock market (which has boomed since the 09 bottom) and the luxury market (which has done much better), is down to the fact that the top end of town has never been swimming in more cash.

As they are predisposed to purchasing discretionary items at the luxury end of the market, it’s only natural that this is outperforming like it has been the last few years.

The full article can be read here.

Bernanke Returns

For any of you who follow the markets, and financial news daily, you may have seen that Ben Bernanke, now a Distinguished Fellow at the Brookings Institution, wrote a piece titled “Why are Interest Rates so Low”. It was published on the 30th March 2015, and was followed up with a piece the next day titled “Why are Interest Rates so Low, part 2: Secular stagnation”

If you want to read both pieces, you can access

article 1 here and

article 2 here.

In the articles, Bernanke was at pains to point out the Fed isn’t ultimately responsible for this era of ultra low interest rates, explaining that they are a symptom of a weak economy.

Specifically, Bernanke stated that, “the Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed.”

Bernanke then went on to discuss that the three most important objectives for economic policy were achieving full employment, keeping inflation low and stable and maintaining financial stability.

Bernanke claims to be sceptical of the thesis that the US economy faces secular stagnation, and chief amongst the reasons he is sceptical is because “the US economy looks to be well on the way to full employment today.”

Interestingly, as Zerohedge pointed out, despite the record debt levels the world is having to deal with, and despite the fact debt has exploded since the GFC hit under this low interest rate environment engineered by the Fed, Bernanke seems largely unperturbed by debt.

Indeed across both of the pieces he has written, he only uses the word debt once, in reference to government stimulus, where he notes that; “more fiscal spending might not be an entirely satisfactory long-term response either, because the government’s debt is already very large by historical standards and because public investment too will eventually exhibit diminishing returns.”

It’s quite incredible that debt hasn’t played a larger part in the two pieces he has written. However, it does look like he will be blogging and contributing his thoughts regularly going forward, so we’ll definitely keep an eye out for what Bernanke has to say next.

The Property Boom and the Australian Bust

The iron-ore price fell below $50 a tonne overnight, continuing an epic crash that has been in place for over a year now. It has laid waste to the Federal (and WA) budgets, will cap any income growth the country would hope to generate, and will almost certainly see the RBA cut rates next week, to a record low of 2%.

The largest miners in this space (BHP, RIO and FMG) are all still focused on expanding capacity, which, coupled with a huge slowdown in steel demand from China could see prices fall even further.

Whilst I’ve been bearish iron-ore (and the Aussie economy) for some time, this is nothing to celebrate, for it is going to bring some serious real world pain, and not just to those directly employed by these companies.

The team at Macrobusiness had a short note out this morning discussing the impact, which you can read here in full, but suffice to say it will affect interest rates, the dollar, and our coveted AAA credit rating.

Despite Australia clearly facing its most challenging headwinds in decades, the property boom still shows no sign of fading. And whilst I have serious concerns for anyone heading into the investment property market today, it could also run a while longer, with interest rates on home loans set to drop below 4%, as this article suggests.

To be honest, with the RBA likely to cut rates all the way to 1.5% (if not 1%) by 2016, I wouldn’t be surprised if we see home loans that come with a borrowing cost of just 3% by the middle of next year.

As to the impact this is having on broader society, there is no shortage of evidence that sky high house prices are causing greater financial stress and anxiety for a large portion of the population, particularly younger Australians.

One of the supposed ‘solutions’ to this could be banning negative gearing, or allowing it only to be used for ‘new builds’, rather than existing dwellings. No market gets more debate and more heated discussion about it than the property market. The attached article contains the views of a handful of commentators, including my own.

Shark – Tank Superannuation

Regular readers of these reports will know I often mention at least one Superannuation article every week. I make no apology for that, for it is the largest financial asset most Australians will build over their working life, so ignoring it when writing about the precious metal market and protecting capital would be kind of silly.

Earlier this week though, I wrote a piece that linked Superannuation to the popular Channel Ten show Shark Tank.

Say what you will about the show, but for me, I’m all for anything that encourages business people and entrepreneurs.

And as I see it, there are three main impediments to small businesses accessing finance in this country, which I’ve listed below

• Private Debt Levels are too high

• Banks aren’t lending to private businesses

• Superannuation ties up money that could be invested in new ventures

For those of you who are interested, please click here to read my full thoughts on Superannuation, small business funding in this country, and Shark Tank.

Happy Easter everyone!

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. This report was produced in conjunction with ABC Bullion NSW.