Gold as First Step on Property Ladder

Precious Metals Commentary
A wild week to end the financial year as both ABC Bullion’s trading volumes and number of transactions were higher than any other week this year. After pulling back on Friday night, gold started the week at USD$1,384 per ounce, before being met with strong buying back up through $1,400 to sit currently at $1,422 per ounce. Silver sat in a much tighter range this week, and currently remains at a low $15.32 per ounce.

Despite the RBA cutting rates this week to a historic low 1%, it was so expected that the AUD lost no ground and crept back above $0.70 US cents, which sees gold in AUD at $2,025 and silver at $21.92. With cash savings delivering such a pathetic return, it is no wonder this latest cut coincided with our busiest week of the year.

We did mention in our last update that we could see gold pullback on profit taking, but the pullback has been short lived at this point, and we expect the mentality to be that of ‘buy the dip’ moving forward as gold has well and truly broken out of the trading range it’s been stuck in for the past few years.

In other metals, palladium has made a sharp recovery back to USD$1,560 and platinum is bouncing around the recent lows in the USD$800-$900 range.

Hold a House in Your Hand

Earlier this week, we sent out an email campaign for our National Conference noting that a 400oz ABC Bullion London good delivery bar was worth more than the median home price in Sydney.

It got us thinking about how gold has performed relative to housing over the past few decades. Our first thought was that with housing rising and then falling since 2017, and the gold price also having a wild ride peaking in 2011 and a bear market since, that the gold-to-housing ratio would be all over the place.

When we calculated the figures we got a surprise. As you can see in the chart below, housing prices in gold terms – in this case as a number of 400oz bars – has been remarkably stable, highlighting gold’s role of maintaining purchasing power over time.

For first home buyers, saving a deposit to buy a home can be a challenge, particularly if home prices are rising while the cash they save is hardly growing with such low interest rates.

The chart above suggests that struggling first home buyers may have been better off putting their regular cash deposit savings in a Gold Saver account rather than in the bank. Up until today, gold has returned over 9% per annum across the last 15 years.

Below are the latest fiat figures for all cities from CoreLogic, showing Sydney and Melbourne with some small gains for the first time since the correction began in 2017. Hobart has been bucking the trend and is now above Perth and Adelaide.

For a brief period in 2006/07, Perth had the highest median on the back of the commodity boom, which is long gone now, and doesn’t show any sign of recovering.

Tavi Costa (Crescat Capital) noted a discrepancy between Australian house prices and our stock market in the chart below. He said that it “resembles the US housing bubble in 2007. Real estate collapsed first, and equity markets followed”.

Central Banks to the Rescue

This week the RBA lowered the cash rate to 1.00% to “help promote our collective welfare”. Although our subheading is sarcastic, that quote is not - it comes directly from RBA Governor Philip Lowe.

In his speech, Lowe did note that the “benefits [of RBA monetary policy] are not evenly distributed across the community and that there are some downsides to monetary easing”. As we have noted (OK, ranted) in previous market updates, low interest rates might be good for borrowers, but not so for savers.

While the amount of outstanding loans is greater than bank deposits, the idea that lower rates will result in borrowers having more to spend, and thus increase economic activity, is not necessarily correct. In a lot of cases, borrowers continue to make the same mortgage repayment to pay off their home loan quicker, so there is no change in their spending. However savers, particularly those living off investment income, have their spending directly reduced.

There is also a negative feedback loop in that lower interest rates encourage more borrowing and less saving. This results in yet more borrowers relative to savers, which firms the case for central bankers to drop interest rates again if things aren’t turning around because they think what borrowers gain will outweigh what savers lose.

It does appear that the RBA Governor is now aware of this negative feedback loop (let’s call it a “debt sinkhole”, much more graphic) because he also said that “we should not rely on monetary policy alone. We will achieve better outcomes for society as a whole if the various arms of public policy are all pointing in the same direction”.

Translated, that means “there is only so much low interest rates can do, you bludgers in government need to do stuff as well”.

Advisory firm Real Investment Advice demonstrated the dynamics of a debt sinkhole in this chart below.

The Bank for International Settlements (BIS) agrees, saying that “monetary policy can no longer be the main engine of economic growth, and other policy drivers need to kick in”. They are a bit more direct, saying that we must reduce our reliance on debt and that central bank monetary manipulations should only be a backstop.

The BIS even went so far as to acknowledge that very low interest rates “have contributed, in part, to some of the financial vulnerabilities we now see” as while low rates may have a boost in the short-term, they encourage risk-taking and debt accumulation over the longer run.

With this view, the BIS looks like it will be in conflict with the European Central Bank as Christine Lagarde looks set to take over from Mario Draghi as ECB President. Lagarde has previously been supportive of negative rates and the market considers her appointment as continuing Mario Draghi’s “dovish” approach to stimulating the eurozone economy.

It will also be interesting to see how the central bank establishment deals with Judy Shelton, who Trump has nominated to the US Federal Reserve Board. Shelton previously served as an economics adviser to Trump during his presidential campaign.

Commentators have noted that Shelton has previously said that Fed's benchmark rate should be reduced to zero - and lower rates are what Trump is after. But we do think it is significant that Shelton is also favourable towards gold and some form of gold standard, which is something that Trump’s other failed choices, Stephen Moore and Herman Cain, were also sympathetic to. It seems Trump is committed to getting someone that will advocate for gold on the Fed Board.

We do hope she gets through the hearings, not because she will be likely to change policy that much, but just because of the awkward questions she’ll probably ask, if this tweet is any indication:

Really? It is now “dangerous” to question whether the intellectual framework and/or mechanisms utilized by central banks are performing optimally to deliver productive economic growth and financial stability?

Competition Is Great, Except in Money

We mentioned Facebook’s Libra stablecoin a couple of weeks ago and how governments didn’t seem too keen on global currency competition.

The BIS has weighed in, arguing for a "same activity, same regulation" rule, which would mean that something like Libra could be subject to the same rules that apply to banks. But what caught our eye was the diagram below, which the BIS call a “regulatory compass”.

To our eye, this is not so much a compass but more like looking down the scope of a rifle at a shooting range target. A sort of Freudian slip by the BIS revealing their real thoughts about big tech getting in on the money business?

Forecasts

With gold breaking through a six-year resistance level, analysts have scrambled to revise their price forecasts. Individually, it is best to take a forecast with a grain of salt, but the value is in looking across many forecasts to see if there is a consensus.

Below are forecast revisions we have come across recently. Keep in mind that these are what professional, institutional investors see, and as a whole the message appears to be that gold will build on its breakout from its six-year resistance level.

• Credit Suisse: average $1,327 in 2019; average $1,350 in 2020.

• BMO: $1,380 average in Q3 and $1,350 average in Q4.

• INTL FCStone: trading range of $1,350 to $1,450 likely.

• RBC Wealth Management: new higher gold trading range of $1,400 to $1,450.

• Morgan Stanley: average $1,435 during the second half of 2019.

• Commerzbank: $1,500 by end of 2019.

• Pepperstone Group: 12-month target of $1,520.

• James Turk: “Central banks recognizing they are losing the battle at $1400. Where will they next ‘circle-the-wagons’ to try holding back this bull market? My guess: $1575.”

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.

Disclaimer
This publication is for educational purposes only and should not be considered either general or 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, and 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.