It’s been another solid week for precious metals, with both gold and silver climbing higher over the past five days. Gold has put on nearly USD $30oz, rising to USD $1225oz, whilst silver is sitting just above USD $17oz currently, up from USD $16.33oz on Friday the 5th December.

In Aussie dollar terms, it’s been a good week too, with further weakness in the AUD helping push the price of gold to $1483oz, up nearly $150oz in the past month alone.

That’s not a bad Xmas bonus for those of us who’ve been steadily accumulating metals over the course of the year.

Why the Rally?

Many people have questioned the strength in gold over the past several trading days, confused as to why it has put on some USD $100oz since the post Swiss referendum plunge.

Certainly there has not been any major bullish catalyst, though the easing of import restrictions and the like in India have helped improve sentiment towards the market somewhat

We’ve also seen some very tepid inflows back into Gold ETFs, with the largest of the lot, the SPDR Gold Trust seeing it’s holdings grow by 1% in December.

The USD rally has also tapered off somewhat lately, though the run it has been on over the course of the year has certainly been impressive, as the chart below shows

In reality though, part of the reason for the rally of late is that many traders who were short gold leading into the Swiss election have simply unwound their bets, and that process alone puts upside pressure on gold prices.

Seen from their perspective, these decisions make a lot of sense. Many of them would have expected gold to weaken substantially in the lead in and immediately after the failed Swiss referendum.

Whilst this did happen to a degree, as we know, gold then turned around and climbed the better part of USD $70oz in a day, as this chart, showing gold price moves from December the 1st highlights

From the point of view of the short-term money manager, it makes sense to unwind your bet in the face of such price action, and this will have helped gold prices strengthen over the past two weeks.

Questions for Gold Bears

One of the better articles I came across this week was from Casey Research’s Senior Precious Metal analyst Jeff Clark, who produced a great report titled: “7 Questions Gold Bears must answer”.

The seven area’s Jeff focused on where

• China’s record accumulation of gold

• The accelerated trend of Chinese gold demand and accumulation

• Hoarding of gold by other countries

• Retail investors holding onto and indeed adding to their positions of SLV (a silver ETF)

• Bullion sales hitting new records

• Mainstream investors turning to gold, like Ray Dalio, who runs a $150bn hedge fund, with a 7.5% allocation to gold

• The repatriation of gold by certain countries

There are some great charts and commentary, so if you have a spare 5 minutes – I suggest you click here.

So has Gold bottomed?

I’m very pleased with what gold has delivered in 2014, especially to investors in Australia. With the domestic economy continuing to deteriorate (more on that below), the reasons to own gold are as strong now as they’ve ever been.

Price action the last two weeks is also encouraging. If there’s one thing the last few years has taught me, it’s that when good news can’t propel a market higher, or bad news can’t propel a market lower, you’re probably approaching an inflection point.

With that in mind, the fact that gold is nearly USD $100oz higher than that post Swiss referendum sell-off is an encouraging sign.

In saying that, the last 18 months has seen a number of false starts for the precious metal market, which has been incredibly frustrating for gold bulls, who are probably as frustrated at the length of this correction as they are the severity of in price terms.

The technical picture for the market is still mixed, and sentiment overall is poor. Mainstream financial commentary is also still predominantly bearish, with articles in Reuters and the like stating that the rally we’ve seen in the gold market these past two weeks is just another dead-cat bounce, with further price falls to come.

The potential for an even larger US Dollar rally in 2015 can’t be ruled out, especially as the Europeans are likely to push harder on the Quantitative Easing front, whilst Japan will continue their attempts to substantially weaken the YEN, in a hope of promoting their exports and stimulating growth.

With commodity prices tumbling, and official inflation low, there are still some obstacles in front of gold and the broader precious metal market.

As such, dollar cost averaging and staggering purchases is still the most appropriate strategy for risk conscious investors.

Aussie Confidence Plunging

It’s been another poor week for the Australian economy, with data confirming the slowdown that is occurring leading into 2015.

Yes, total jobs created beat expectations, with yesterdays employment report indicating that over 40,000 Australians found a job last month. Whilst that’s good news, it needs to be pointed out that nearly all of these were part time jobs, and the unemployment rate still crept up to a more than decade high of 6.3%

Of more concern was National Australia Banks latest business conditions and business confidence survey, which weakened on both fronts. Capital expenditure plans look softer going into 2015, and hiring intentions and the outlook for employment are also weak.

Not surprisingly, this is all feeding into everyday consumer confidence, or the lack there-of. Wednesday’s consumer confidence survey, run by Westpac, was a shocker, showing a plunge of 5.7%. Westpac didn’t mince words, stating that “this a very disturbing result”, and pointed out that consumer confidence is now at its lowest level since August 2011.

Prior to that, you’d have to go back to May 2009 (essentially the middle of the GFC), to see the number so low. This can be seen on the chart below.

Fully 96% of survey respondents thought the outlook for employment was unfavourable, the worst readings since 1975 on this particular category.

Worse still, we’ve clearly got less room to move now than we did back in 2011, last time confidence was this low. Back then, commodity prices and our terms of trade were still strong, whilst the budget was still looking relatively healthy.

On the monetary side, the cash-rate was 4.75% in August 2011, literally the peak of the post GFC rate hike cycle. Despite 225 points of easing since then, we’re in same spot confidence wise, and with a materially worse outlook on the employment front.

As such, Australian’s are likely to disappoint our Federal Treasurer, who recently pleaded with them to spend up big leading into Xmas.

The silver lining (pun intended) in all of this is the performance of physical gold in AUD this year. Currently sitting at $1483oz, we are now just over 10% for the year, comfortably outperforming shares, term deposits and even property in many markets.

With cash rates almost certain to fall to 2% or lower next year in Australia, the logic behind holding gold only strengthens by the day, and with that, the recent outperformance of precious metals is a trend we expect to continue for the coming years, despite the volatility we’re witnessing on a day-to-day basis

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.