It’s been a good few days for precious metal investors. After dropping below USD $1150oz on the 18th March, we’ve seen a more than USD $50oz rally in the gold price, with the yellow metal again trading back above USD $1200oz.

Silver has had an even more impressive move, rising over 10%, from USD $15.47oz to USD $17.26 as we speak.

Australian dollar investors haven’t had quite the same bounce, with the AUD rising strongly over the past few days, currently sitting at USD 0.7826, a more than 3% rise since the mid month lows around USD 0.76.

The recent strength in the yellow metal has not been unexpected, with the US Dollar rally petering out, market volatility returning with share markets the world over falling a couple of percentage points, and the technical picture also looking more favourable for gold.

Underpinning this of course has been the markets reaction to last weeks Federal Reserve Monetary Policy Statement, which was almost universally viewed as dovish, and suggestive of a slower path to the first interest rate hike.

At one point overnight, gold traded as high as USD $1220oz, though it has since pulled back, after an intraday reversal in the US Dollar, which you can see on the chart below.

On the data front, we’ve seen another bad week for the US economy. The only data point offering any support was the Markit Services report, which rose for the month of March.

Overwhelming this though was another plunge in durable goods orders, which fell 1.4% for February. As it stands, forecasts for Q1 GDP have fallen to below 0.5%, with a good chance that the US is actually heading back towards a recession.

Arguing against this has been the recent strength in non-farm payroll employment growth, and the continued decline in the unemployment rate. These are the only data points suggesting a stronger economy. If they are to roll over, we suspect the market will begin to doubt whether we will see any rate hike in 2015.

Were that to happen, we’d expect gold prices to be supported. In the meantime, we’ll take a quick look at gold from a technical perspective, which my colleague John has put together.

Let’s get Technical

Since the recent top of $1,300 US it's been a waiting game to see whether or not gold would break south of $1,130 US and make a new bottom. So far we have held $1,140 and had seven straight positive days to put us back above $1,200 US, with an above average volume day last night almost touching $1,220 before easing off.

This has been largely on the back of dovish tones from the Fed and a drop in the US dollar. Gold would have to continue to rally and make a higher high than $1300 US, otherwise this weeks rally may just be another bounce, which we’ve seen plenty of in the past year or so.

One of the more interesting technical indicators is the use of Fibonacci retracements. The theory is that areas of support and resistance will occur at 23.6%, 38.2%, 50%, 61.8% and 100% retracements between the two extreme points of a trend.

Why does this happen? It's either there is a secret to the universe where golden ratios can predict the future, or that a lot of people trading financial assets follow the same textbook and behave the same way when these levels are reached.

I think it's the latter.

So a good spot to see how reliable this TA tool presents itself here. If we have a look at the daily chart below the recent overwhelming trend is a downtrend since the mid January high of $1,300. The recent bottom of this trend is $1,140. So the four main Fibonacci retracement lines are the blue horizontal lines below. Theory has it that the price should hit resistance at either the 38.2%, 50% or 61.8% retracement points before rolling over and continuing down. We currently sit right on the 38.2% point at $1,200 US. So the next week or so we'll be able to see if gold tops at either $1,204, $1,222 or $1,243 before rolling over and the downtrend continuing. A break above and through the 61.8% and 100% levels would suggest the downtrend is over and the bulls are in charge.

Fundamentals and price sensitive news will always overrule technical analysis in my opinion, but will be interesting to see how long this rally lasts. I would think there is a pretty good chance of US gold topping between $1,200 to $1,250, and would start getting exited only if we get above that $1,300 previous high.

US gold still looks like it’s in a cyclical downtrend, but so is the Australian dollar. Dollar cost averaging still seems the best course of action in such an environment.

Australian Interest Rates – How Low Can we Go?

As regular readers will know, we’ve long been predicting that interest rates will fall much further in Australia. We see that as supportive of including gold in a portfolio for two main reasons:

• Low rates will naturally force investors to look for alternatives – and gold should be a beneficiary of this

• Low rates should eventually translate through to a lower AUD, which will be a boon for local gold investors

Up until earlier this year, predicting lower interest rates was a lonely place – with most market economists suggesting that the cash rate would head higher in 2015.

Indeed a November 2013 survey from Bloomberg didn’t have one economist predicting a rate cut in 2015. Since then, of course we’ve seen one rate cut, with potentially many more to follow.

This week, we’ve seen Vimal Gor, Head of Income and Fixed Interest for BT Funds Management release a note calling for much lower interest rates.

Vimal suggested that the employment situation in the country was a major concern, noting that: “By far the worst aspect of recent Australian data has been the collapse of wage growth. To a workforce that has experienced massive (underserved by productivity gains) wage increases over the last few decades this will come as a real shock. We also expect unemployment to continue to trend upwards to above the range that defined the Australian job market pre the mining boom."

As for where interest rates could end up – Gor thinks they could go a lot lower, stating that: “In this environment Australia’s 10-year bond yield and official interest rate could easily head below 1 percent – particularly if housing flatlines or begins to fall in Sydney and Melbourne"

That would be a series of kicks in the guts for those on fixed incomes and with money in term deposits. I think he’s right that we’ll see rates head down toward that level in the coming years, and it will eventually translate in higher gold prices.

You can read his full note here

A Super Warning!

Another subject readers of these reports know I’m quite passionate about is the superannuation industry in Australia, and my overwhelming preference to have a Self Managed Superannuation Fund. This week, we’ve seen two examples of why that is the case.

The first was the noise emanating from this week’s ASIC annual conference that superannuation lump sums could eventually be banned by the government, with people being forced into annuity products.

As this article in the Canberra times suggests; “Australians entering retirement will most likely be stopped from taking their superannuation as a lump sum and will have to access it through a structured self-funded pension, a top Treasury official says.” The article goes on to state that; “ Instead, when people retire their superannuation savings would automatically be transferred to a default fund designed to manage it in the paydown phase and provide a stream of retirement income.”

As I never tire of telling people, if you have a SMSF, you are the trustee, in legal control of your own funds. It’s a power that is going to be worth having in the coming years.

The second article of note this week appeared in SMSF adviser online, and was to do with RBA warnings about asset allocation in super funds.

As the article states; “Until recently, a majority of superannuation funds’ members have been in the accumulation phase, meaning that asset allocations have been geared for growth, the RBA stated in its Financial Stability Review, released yesterday. Now, a significant number of investors are moving into the drawdown phase, with those over 60 years of age owning more than one third of superannuation assets. As this transition progresses, the RBA anticipates funds are likely to increasingly invest in more conservative and liquid assets, including cash and deposits. “Superannuation funds will also need to carefully manage the liquidity implications arising from the ageing of the population and the maturing of the superannuation system, as benefit payments increase relative to contributions.”

There are huge implications as a result of these changes, particularly for younger Australians and those in their mid 30s and mid 40s. Essentially, what is going to happen in the coming years is that younger Australians are going to continue tipping money into this system, bidding up the prices of the assets the funds invest in. On the other side of this, you are going to have more and more retirees looking to cash out of Super (especially if they’re worried they’ll lose the freedom to do it) which will serve to depress prices for those assets.

If you are just one of tens of thousands of members invested in a traditional fund, you are totally at the mercy of these forces. With an SMSF, you are in complete control of your own financial destiny, and where your assets are invested.

Considering by law you’ve got to put 9.5% of your money into this game, it makes sense to be in control of it for yourself personally.

The articles I’ve referenced are further evidence of this.

Friends and Enemies

As a final read for the week, we wanted to share the following report, titled “Yuan and Gold: Old Enemies Should Finally Become Friends.” It is a bit of a long read, but well worth the time, especially the first part, which covers shipments of Chinese gold to the Kuomintang Government in Taiwan toward the end of the Second World War.

Hope you enjoy it

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.