It’s been a disappointing start to September, typically one of gold’s strongest months, with precious metal prices weakening across the board. Gold, which started the month around USD $1285oz, has fallen to just below USD $1250oz, whilst silver is closer to USD $18.90oz, down 3% in the first two weeks of the month.

Strength in the US Dollar, which has rallied substantially against most currencies these past few weeks, has been the major factor behind the weakness in the precious metal market these past few days, whilst the lack of response in the gold market to geopolitical developments in the Ukraine and Iraq/Syria has also concerned investors, as typically you’d expect more of a safe haven rally in precious metals.

Gold ETF holdings, which had held up relatively well for the first nine months of the year, have begun decreasing again, with the flagship GLD ETF now sitting at just 788 tonnes, down approximately 20 tonnes on where holdings were in the middle of July.

On the futures market, open interest is close to its lowest level in five years, highlighting lack of investor demand, whilst managed money traders (i.e. short term investors) have been adding to their short positions quite aggressively of late, something we expect to have continued this week, in light of the price weakness.

Meanwhile, a whole heap of technical analysts have released pieces in the last few days pointing to violated moving averages and the like, with most fairly bearish on what comes next for the precious metal market.

On the physical side, Shanghai gold premiums have risen in the past few days, indicating support from the world’s largest gold consumer and producer, whilst demand out of India can also be expected to stabilise if not strengthen in the coming months.

As for where the market heads from here – we reiterate previous messages that we’re still in the process of bottoming, and that one final wash out in the sector wouldn’t be entirely surprising

As you can see from the chart below, which goes back to the start of 2011, gold had a burst to the USD $1900oz level 3 years ago, followed by three failed attempts to bust through USD $1800oz.

Since then, we had the original flash crash of April 2013, which saw prices ease down toward the USD $1300oz mark, and since then a double bottom around USD $1200oz.

As a result, another test of the USD $1200oz mark could well be on the cards in the coming weeks.

For me personally, dollar cost averaging into the sector at these levels makes a lot of sense. Calling an exact bottom is nigh on impossible, and I’m happy enough being able to buy gold and silver at today’s levels.

US Economic Update

On the surface, things seem to be going pretty well for the US economy. Despite the plunge in Q1 2014 GDP, Q2 rebounded stronger than expected, and survey after survey seems to highlight and underlying strength in the economic recovery.

Even last week’s huge miss to non-farm payroll growth, and overnight news like the plunge in mortgage applications are being written off as noise, with the consensus very much that the US is on the way to escape velocity, and that the Fed will be raising interest rates, potentially within the next 6 months.

This theme, alongside the weakness in the Euro due to recently announced negative rates and QE by the European Central Bank, the expectation that the Bank of Japan will need to do more as Japanese GDP plummets, and the weakness in the British Pound of late (due to the Scottish independence vote), is all leading to a very strong USD rally.

As gold is often seen as just an anti US dollar play, its therefore not surprising that the tone for gold is weak right now, but we’re not convinced at all of the sustainability of the US economic recovery, and this week, we’ve seen a great article, from Gluskin Sheff Chief Economist David Rosenberg, which helps explain why.

The whole article is well worth the read, but the Rosenberg explains two key themes that are, and will continue to hold the US (and indeed the entire developed world) back; namely

• Debt burdens that are still too high. Global debt (not including unfunded liabilities) is approximately US $92 Trillion, 125% of global GDP and at about the same level as when the GFC hit

• Demographics and insufficient baby boomer retirement savings, with Rosenberg noting a recent poll which showed that nearly 15% of Americans aged 65 or up have no retirement savings at all, whilst 26% of those aged between 50 and 64 have no savings either

Debt, Demographics and modern day ‘democratic’ government! These are the three key mega-trends influencing the global economy. All else is just noise and part of the 24-hour news media cycle.

Jobs reports, inflation stats, consumer confidence – whatever these readings do on a month to month basis won’t change the fact debt levels are too high, unfunded liabilities can’t be honoured, demographics exacerbates the problem, and modern day democratic governments aren’t able to fix the problems, even though they might like too.

Bottom line – we’re in for a rough ride, and prudent people will continue to look at assets like precious metals for true safe havens.

More evidence that the current weakness and uncertainty in the precious metal market is a buying opportunity.

You can read the whole Rosenberg article here

Australian Economic Update

What’s happening locally will have a big impact on Australian dollar gold and slver investors in the coming years, and whilst the news is mostly negative when it comes to the economy, it should help provide even stronger returns for Australian precious metal investors like yourselves.

This week we’ve seen

• Business conditions pull back markedly and Business confidence ease

• Consumer confidence fall significantly, back to post Budget levels

• Home loan data miss expectations – though with investor demand soaring, exacerbating fears over Australia’s property bubble

• A huge plunge in iron ore prices (our key commodity export), which will wreak havoc on the next set of budget estimates

Today we’ll have unemployment numbers out, and while there’s a chance the headline number (seasonally adjusted) could improve, the trend is likely to continue deteriorating, highlighting the weak outlook for demand and ultimately labour in the country.

On that note, it was instructive that Coca Cola Amatil has just struck a pay freeze with existing workers, whilst new employees will be paid 38% less than current ones.

This was covered in a short post at Business Insider, written by Greg Mckenna, which you can read here

With that in mind, its hardly surprising real wage growth is now negative in Australia, and is likely to remain that way for some time to come.

Whilst this is bad news for the Aussie economy, there could be a silver lining for precious metal investors in that the AUD could well sink a lot further in the coming years (it’s back below USD $0.92 now), as the RBA is forced to cut rates below 2% in response to the weakening economy.

Coupled with the fact that gold and silver look like they could be bottoming soon, and the final (and most profitable phase) of the precious metal bull market lies ahead, AUD weakness will likely prove an added bonus for our clients, magnifying gains.

Fascinating charts on gold production

Before we finish this weeks report, wanted to leave you with two fascinating charts on gold production, which conclusively prove why there’ll be no major supply side response (i.e. significantly higher levels of gold mining), even as the precious metal market finally bottoms out, and continues on its secular uptrend.

The first shows that world mine production has been more or less flat since the 1990’s, even though prices have more than tripled, whilst gold discoveries have plummeted.

The second chart is perhaps even more interesting, as it highlights how long it now takes to bring a mineable deposit into production

You can read the article where these charts came from here, but bottom line, gold production globally isn’t going to rise in any major way in the coming years, and this is another reason to hold the course with your precious metal investments.

It can be difficult in times like this, but its also where the biggest rewards come from.

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.