Gold prices have rallied this week, with the price of the yellow metal trading at USD $1171oz at present, up USD $20oz on last Friday’s London PM Fix.

The bounce has fed through to silver too, which is currently sitting at USD $16.26oz, up from USD $15.50oz where it was sitting last Friday.

AUD gold is now firmly back above $1500oz too, with the local currency now trading at USD 0.7651, after a volatile week on FX markets, with most major currencies experiencing significant moves in the past 48 hours.

The catalyst for all of this was of course the release of the latest Federal Reserve Monetary Policy statement, and the Janet Yellen press conference that followed soon after.

In the week leading into the release of this policy statement, there were hundreds of articles written as to whether or not the Fed would drop the word ‘patient’ from the statement, which would be interpreted as them moving closer to their first interest rate hike in nearly 10 years.

This did end up eventuating, with the Fed officially dropping its patient stance, but the Fed was at pains to point out that whilst they’re no longer officially ‘patient’, there is also in no rush to raise interest rates.

On the patient versus impatient continuum, the Fed appears to have carved out a niche of their own. Some of the other highlights of the FOMC statement, and the Yellen press conference were that they thought;

• Rates could rise any month after April but very unlikely to happen then

• That they wouldn’t rule out rate rises after April

• That they saw only a slow housing recovery

• They saw inflation as remaining low this year

• They saw wage growth as remaining sluggish

• They believe that export growth looks to have weakened

• They believe that growth rates have slowed in Q1 2015

All of this was fairly typical – a lot of words that don’t really say anything or give the market any clear direction on what will happen next.

Most noticeably, the infamous ‘dot plot’ – which predicts where FOMC members think interest rates will be at various points in the future, reduced noticeably. As it stands now, most see the end 2015 interest rate at just 0.625%. In the previous few months, they had seen interest rates as high as 1.125% by the end of this year.

We aren’t even sure they’ll get to 0.625%, though we do think they will be keen to get at least one rate hike in.

In the immediate aftermath of the FOMC release and Yellens news conference, everything rallied. Foreign currencies, gold, equities, you name it – it all went up, with most perceiving this news as dovish, and likely to delay rate hikes.

The dovish tone from the Fed is hardly surprising, for US economic data continues to roll over.

After all, this week we’ve seen

• The NY Empire State Manufacturing Index fell to 6.90 this month, well below expectations

• Industrial production rose by just 0.1%, less than expected

• Capacity utilization fell to 78.9% this month, when the market expected it to rise

• The NAHB housing market index fell to 53 points, below expectations

• Housing starts plummeted by 17%, the worst result since 2011. Weather was blamed (again), but the market had predicted a much better result, and these strategists were well aware the weather had been cold.

Finally, the Philadelphia Fed Manufacturing survey also fell to just 5.0, versus a market expectation of 7.1. Margin compression is now the worst since Lehman, with this handy little article on Zerohedge showing some useful graphs on the matter.

The bottom line to all of this data is that with the USD surging, and the US economy already slowing sharply, we are very dubious that we’ll get any kind of major tightening in the United States.

We wouldn’t be surprised to see one, or maybe even two rate hikes, but we are more than certain that there will be further policy easing by the Fed in the coming years. We aren’t as convinced that we’ll see a QE4 from the Federal Reserve this year, but it could just be a question of time.

One final comment that Yellen made which was interesting was that she did think that financial markets, and shares in particular, were on the ‘high-side’ when it comes to valuations.

This brought to mind one of Warren Buffets indicators when it comes to assessing the share market, which basically measures the market capitilization of US stocks relative to US GDP.

The chart below, which my colleague John Feeney produced in a blog earlier this week, tracks this metric going all the way back to 1950.

As John stated; “US stocks are more overvalued than any other time since the 1950's, second to the dot com bubble in 2000”. You’ll notice that we are now comfortably more overvalued using this metric compared to where we were when the GFC hit.

You can read more about this here.

The Fix is Out – The Fix is In

Not that is directly relevant to where gold prices are headed, but today is a historical day for the physical gold market. Thursday the 19th March 2015 marked the last day that the London Fix was set via the old phone call process that occurred between a handful of banks at 10.30am and 3pm each day.

For those interested, we wrote a short piece on how the Fix works which you can access here.

But going forward, things will change, with ICE Benchmarks Administration taking over the fixing process. It will still take place twice a day, and a number of banks will be involved in the process, including HSBC, Scotia Mocatta, Barclays and Societe Generale.

You can read a bit more about the process here if you are interested.

For reference, the last ever PM Gold Fix under the old system was USD $1166oz.

What next for Gold

The latest bounce in the gold price has been encouraging to see, especially in light of all the FX volatility that has taken place since the FOMC. In saying that, gold is still making lower lows and lower highs, a process that’s essentially been in place since the market fell out of bed in April 2013.

As such, this recent strength may prove short lived, with dollar-cost averaging still the best process for long-term buyers.

Short-term, gold has been pretty oversold, so that could be supportive of a larger bounce, whilst recent ETF withdrawals would indicate some weak hands have been flushed out.

If it can hold above the USD $1130-USD$1140oz range, then gold may make a sustained push higher, but any break lower than that does open up a path to the USD $1000oz range.

Until we see an end to this incredible US Dollar rally, it’s going to be impossible to fully call the cyclical gold bear market over.

East to El-Dorado

ANZ released a fantastic article this week on the gold market. Titled “East to El-Dorado: Asia and the Future of Gold”, it made a base case of a USD gold price of around USD $2,500oz by 2030, with rising incomes and pro-cyclical consumer demand from Asia combining with renewed interest from central banks, both of which will support demand in the coming years.

They were also happy to acknowledge World Gold Council research that showed that investor portfolios would be better balanced with an up to 11% portfolio allocation to gold.

We think in the coming years many investors will end up wanting to have a much larger allocation than that, but there is no doubt it would be a great start for most investors to have even 10% of their wealth stored in physical gold.

ANZ also observed that they estimated “that total retail and institutional gold demand for the Asia 10 region could amount to almost 5,000 tonnes per annum by 2030, up from 2,500 tonnes currently.”

The next crash!

For a final read of the week, do take a look at the latest from Albert Edwards, the supposed ‘uber-bear’ from Societe Generale, who once called for a USD $10,000oz.

He has largely been disparaged for that call, which he made back in 2013 when gold was of course tanking at its fastest pace in decades. Nevertheless, his global macro insights are always worth paying attention too, and his latest is no different.

The following two comments were particularly notable, with Edwards stating that; “I don’t think that real economy factors – such as inflation or growth – justify a tightening. But rates are too low for the financial economy: they are encouraging financial smarty-pants to do the same sort of things that got economies into a jam in the first place.”

He then went on to observe that; “One of the reasons why QE has been ineffective, despite inflating household net wealth to a record $83tr in Q4 last year, is that the rich tend to own the assets but have a low marginal propensity to consume, while the poor with a much higher propensity to consume tend to own the debt. Even the central banks agree that QE has made inequality worse – hence the BIS warnings of increasing social unrest if these policies continue in extremis.

I couldn’t agree more with both of these statements, and the sentiment behind them.

For a more detailed read from Albert, click here

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.