Gold Bounces Back from Oversold Levels

Precious Metals Commentary

Volatility in precious metals prices continued this week with gold dropping as low as $1,446 before rallying back up to $1,470 at time of writing, with silver recovering most of the early week’s losses and trading back above $17 per ounce.

The big news this week for local investors was the surprisingly bad jobs number for the month of October, with Australia losing over 19,000 jobs in the month verses an expected 15,000 gain. The worst jobs print in over 3 years indicating a much higher probability of an RBA rate cut within the next few months and of course the AUD was slammed back to 0.68 US cents with some weak Chinese industrial production numbers adding to the pain.

So the weak AUD may have upset a few investors hoping to top up their metals positions this week, but we did get as low as $2,120 this week, with last week’s market update letting investors know that we were in oversold conditions on a weekly chart, which usually coincides with a medium-term low in the market. The chart we posted last week has broken back above the critically oversold zone, and has signalled a low in AUD terms below $2,120 for now, so it will be interesting to see if our favourite technical indicator for AUD gold remains reliable again.

At the beginning of this month, ABC Bullion's Global General Manager Nick Frappell noted that while the market was bullish, it was “feeling a bit stale” and said that the next support level was $1,446 - the 38.2% Fibonacci retracement of the May-September rally. On Tuesday, the 12th gold recorded a low of $1,446.20 on the active CME gold futures contract.

Nick says that the gold price made a small ‘doji’ candlestick pattern on Nov 12th, which is a small bullish signal when it occurs after a succession of lower days, and since then the price has regained more ground, giving some confidence that the move to $1,446.20 was part of a corrective move. Short-term targets on the upside extend to $1,477 and $1,489, and there is decent resistance expected at $1,488.

Expect some further whipsawing on the back of commentary around trade deals, as we seem to be reacting to that for the time being. In longer-term news, Global Debt hit a fresh record high of over $250 trillion dollars thanks to a huge debt binge in China and the US as we traverse a period in time that echoes the ‘roaring 20’s’:

“Borrowing by governments, households and non-financial business now accounts for more than 240% of the world’s gross domestic product, and it’s growing faster than the global economy.”

Buyer Behaviour: West vs East

The World Gold Council (WGC) released its quarterly Gold Survey Review and Outlook last week. They noted that mine production was virtually unchanged with a price driven increase in gold recycling boosting gold supply 4%.

On the demand side, jewellery was off 16% due to higher gold prices and consumer uncertainty about the global economy. Central bank buying remained healthy but we found the divergence in investment to be the most interesting feature.

The WGC said that retail investment volumes fell 25% year-on-year with bars and coin demand down 50%. At the same time, ETF demand surged to 258 tonnes, which was the highest quarterly inflow since the third quarter of 2016.

Below is a chart of bar and coin demand and that for ETFs over the past ten years. Since the financial crisis, they have moved in opposite directions at key points, the first being in the first half of 2013 after gold broke through $1,550 and fell to $1,200. Physical bar and coin demand surged while ETFs sold off.

Contrast that to 2019 when gold broke through the long-term resistance level of $1,375. ETF buying turned around while physical dropped off.

The reason for this divergent behaviour is down to the different types of buyers represented by these two statistics. Bar and coin volumes are dominated by India, China and other key Asia countries. They are traditionally price sensitive bargain hunters, buying on dips and backing off on big price increases.

ETFs, by contrast, are primarily composed of Western retail investors and institutional/professional money managers. Advisory firm CPM Group notes that 73% of fund managers who trade metals do so “on price charts, price momentum, and computer-generated trades” rather than fundamentals, hence they are price sensitive - but in reverse - selling on weakness and buying with optimism on price rises.

CPM Group’s review of 6,800 hedge funds, commodity trade advisors, and commodity pool operators found that fewer than 2% of those professional money managers trade metals, which just confirms that we are still in the early stages of a bull market. They also noted a shift by institutional investors to using indexed ETFs and funds rather than investing in individual companies, which has hurt the smaller mining equities that aren’t large enough to be included in an index or fund.

Dystopian Socialists

This week the World Gold Council released initial results from a survey of the opinions of 12,000 active retail investors and 6,000 fashion and lifestyle consumers in the key markets of China, India, Germany, US, Canada and Russia.

Confirming the behaviour we charted above, the survey found that bars and coins were seen as long-term investments, often to be handed down to the next generation, but gold-backed ETFs were viewed as something to be sold within less than five years.

Of investors who had purchased gold in the past 12 months, 44% did so for risk minimisation reasons. It should therefore not be surprising that gold sold off as US-China trade tensions eased. Price moves were still a significant driver of behaviour, with 31% of investors nominating price as a trigger.

Encouragingly, only 20% of North American investors would not consider buying gold, with 41% having never invested in gold but would consider it. This shows that there is significant dormant gold demand and another indicator that the bullish move over the past five months is still in its early stages.

The survey also found that ethical considerations were important, with 70% of gold jewellery buyers preferring to buy pieces produced with minimal impact on the environment and fair working conditions for workers.

ABC Refinery, who supplies gold to ABC Bullion and our associated wholesale jewellery manufacturing company Palloys (which touches 85% of Australian jewellers), has extensive accreditations and compliance to responsible gold production standards.

Such standards will become increasingly important as the WGC notes that younger generations have much stronger preferences for products with minimal environmental impact. Interestingly, the WGC found that millennials’ attitudes towards gold are not significantly different to those of older generations.

Gen Z are more likely to want to see exponential growth from their investments and thus cryptocurrencies feature more highly in their portfolios but the WGC notes that this is not exclusionary of gold, which is still seen as a long-term wealth preserver by Gen Z.

This openness to gold (favoured by individualistic baby boomers) from the most socialistic age bracket may appear contradictory, but recent research suggests that the young are misanthropic and “dystopian socialists”.

As an age group that is the most distrustful of other people, it should not be surprising that they are not dismissive of gold - the preeminent asset that does not require trust in someone else. Looks like gold’s long-term demand is assured and we won’t be seeing any OK Boomer responses to suggestions to buy gold.

The World Has Gone Mad

A baby boomer who is becoming dystopian is newsletter writer John Mauldin (followed by over one million readers), who says he is despondent and 100% in agreement with Ray Dalio’s latest article titled The World Has Gone Mad and the System Is Broken.

One of Ray’s key points is that as there isn’t enough money to fund US pension and healthcare obligations, the only options are:

1. cutting benefits,

2. raising taxes, or

3. printing money.

While none of these three paths are good, he says that printing money will be the path chosen as it is a hidden way to transfer wealth and tends to make nominal asset prices rise (even though they may be going backward after inflation).

Australia is also grinding towards a zombie economy reliant on asset price inflation, with the RBA softening up the markets for “unorthodox” monetary stimulus. While they have mentioned quantitative easing previously, the fact that Philip Lowe will be dedicating a speech to the topic on November 26th is being seen as presenting it much more formally.

RBA governor Philip Lowe was reported as saying that while they were looking at quantitative easing, negative interest rates were extraordinarily unlikely in Australia.

We can only hope they stick to this and stop any further interest rate cuts, which bank bosses told a parliamentary committee “probably dented some level of consumer and business confidence” and that “further rate cuts will not lead to a pick-up in economic activity”.

Instantly Worthless Gold

Earlier this year, the asteroid 16 Psyche was in the news on the back of a planned NASA mission to study it as well as speculation around mining asteroids for metals.

16 Psyche is 225km in diameter and orbits in the main asteroid belt. According to NASA, it is “primarily composed of iron and nickel, similar to Earth's core, leading to speculation that it is the remnant core of an ancient planet left after collisions stripped away its rocky outer layers”. It is also speculated to contain gold and platinum.

Given its mass is 27,000,000,000,000,000 tonnes, even if only a very small percentage of it contains gold, it would dwarf the world’s current above ground gold stocks of 190,000 tonnes.
Apparently, the Earth’s core contains 1,600,000,000,000,000 tonnes of gold, so it is not unreasonable to speculate 16 Psyche might have a bit of gold in it.

An editor at Bloomberg, Joe Weisenthal, tweeted this week about 16 Psyche saying that “it would be very good if $700 Psyche quintillion worth of gold landed on earth. Gold would instantly become worthless, and all the goldbugs would instantly go broke and stop wasting everyone's time”.

Very funny, Joe must be a friend of Jason “Pet Rock” Zweig, who we mentioned back in August.

If Joe wants to talk about worthless, we’d suggest something closer to home would be the $22 trillion worth of US government debt, visualised below in stacks of $100 bills - and this graphic requires a couple more note towers since it was last produced in 2017!

If anything is likely to become instantly worthless, it is more likely to be the paper promises of dollarbugs rather than something which has been valued by multiple societies for millennia.

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.

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