Gold Consolidates as Markets Continue to Wobble

Precious metal prices have consolidated last week’s strong gains, with gold currently trading at USD $1,225oz, whilst silver is sitting at USD $14.55oz.

In Australian dollar terms, gold and silver are sitting at $1,728oz and $20.60oz respectively, with the AUD again falling below USD $0.71.

Overnight, we saw more volatility creep into equity markets, with the S&P 500 down nearly 1.50%, whilst the NASDAQ fell over 2%. European stocks were also in the red, with the DAX down 1%, whilst losses were also seen in Asia.

There was no one news item driving the move, though there are continued concerns regarding the proposed Italian budget, Brexit is still is in the news (some 2 years after the vote), and fears over a trade war continue to simmer.

Given the sentiment in broader markets, as well as the macro and geopolitical backdrop, it should be no surprise that gold prices have consolidated last week’s very impressive move higher, with the technical picture now clearly favouring the bulls.

Indeed, gold could correct all the way back down to USD $1,200oz without doing any technical damage, with our trading team seeing upside targets extending as far as USD $1,287oz, though much work remains to push the metal toward that level.

The price action in gold last week definitely stimulated investors’ interest around the world, with ETF investors turning net buyers off the metal after months on outflows, whilst closer to home, we saw a notable uptick in buying, and a near doubling of people opening accounts to buy bullion, relative to what we see in a regular week.

The chart below, which comes from an excellent update from Clive Maund titled “Gold 7-Year Bear Market Phase is Over”, highlights the improved outlook for the metal, with momentum swinging to the upside, whilst the big volumes posted last week are also a positive sign.
 
 

As it stands now, gold has moved above its 100 day moving average, which will encourage bulls. More importantly, it will be causing concern to those who are short gold, with the potential for a sizable short covering rally given how stretched the market is, which can be seen in the chart below from Bloomberg, looking at CFTC positioning over the past three years.

Indeed, according to a recent update from the World Gold Council, the net speculative position in gold markets are near negative levels last seen in 2001, when gold was comfortably below USD $300oz.

In other gold related news this week, we’re seeing a continued pick up in interest from central banks, with Hungary and Poland the latest countries to add to their holdings. Hungary boosted their gold holdings by a factor of 10, buying over 28 tonnes in October, whilst Poland added an admittedly more modest 4.4 tonnes in September.

Russia continue to accumulate gold, whilst also continuing to divest their holdings of US Treasuries, which have dropped to just USD $14 billion, down from USD $180 billion back in 2011.

Meanwhile at the consumer level, despite the gold price heading above INR 90,000 per ounce (a 5 year high), we are seeing robust physical demand for gold in India, something we’d often expect to see at this time of the year in the lead up to Diwali.

Add all this up and the outlook for bullion is considerably brighter than it was just a couple of weeks ago, which should provide encouragement for longer term investors looking to add to their positions.

House Prices to Drop by 20% in Sydney and Melbourne?

In many ways, yesterday was a good news day for the Australian economy, with the unemployment rate dropping to just 5%, an incredible result that was well ahead of market expectations.

Pleasing though the headline figure was, most analysts have tempered their excitement, noting that underemployment and labour underutilisation rates are still very high, whilst labour force participation plunged, with 31,600 Australians leaving the labour force last month, hardly an encouraging sign.

An economist from JP Morgan, Tom Kennedy, also pointed out another reason the headline unemployment figure dropped to 5%, noting that; “it appears part of the drop in the unemployment rates owes to the survey’s rotation, with the unemployment rate of the outgoing group meaningfully higher than the broader sample, while the jobless rate of the incoming group was below the group mean at 4.4%.”

Going forward, we expect the situation on the employment front to deteriorate, especially as the economies of New South Wales and Victoria slow down. Those states have meaningfully lower unemployment rates than the rest of the nation, at 4.4% (NSW) and 4.5% (Victoria) respectfully. Expect those readings to rise in the year ahead.

Key to the expected slowdown in the economy on the East Coast is the housing market, with the news going from bad to worse in our largest and most valuable property markets.

Last week, property prices (according to Core Logic data), fell another 0.19% across the five major capital cities, which doesn't sound like much, but, if repeated on a weekly basis for one full year would mean a fall in prices of almost 10%.

The continued weakness in prices, as well as continual softness in auction clearance rates has led AMP Capital to downgrade their forecasts for Sydney and Melbourne property prices.

Yesterday, AMP Chief Economist Shane Oliver published a very insightful article looking at the housing market via Livewire Markets, which you can access here.

In it, he stated that he now expects a peak to trough decline of some 20%, which will take until 2020 to fully play out, with the following chart highlighting the clear relationship between auction clearance rates and house price growth.
 

Apart from the clear message that investors should be wary of catching a falling knife in the property market, AMP believe that bank shares and term deposits will also be under threat, noting that these developments are; “consistent with our view that the RBA won’t be raising rates until 2020 at the earliest and given the downside risks related to house prices it may have to cut rates. Housing weakness will also continue to constrain bank share returns.”

Sounds like a pretty good reason to own gold and silver to me.

Haste Makes Waste

Before finishing this market update, we wanted to share a link to a great article published by Morgan Housel, titled “Haste Makes Waste”.

In the article, Housel looks at the implications of artificially stimulated growth, and why, even though it may be beneficial in the short term, brings with it a host of long term risks and negative consequences.

The article references experiments with fish, with companies (using Starbucks as an example), and in humans, looking at an ex-partner of Warren Buffet who, in their haste to get rich quick, ended up having to sell out of their interests in Berkshire Hathaway in the mid 1970s due to excessive leverage.

Reading the article, we couldn’t help but make the link between artificially stimulated growth, and western economies as a whole. Over the last 45 plus years, the United States, and most if not all developed market counterparts, have continuously added to their debt piles, with an explosion in household, corporate and government debt, the latter of which is represented in the chart below.
 

For the last 45 years, this has “felt good”, and has helped us achieve GDP growth well above what would otherwise have been seen. It was always going to be unsustainable though, and we’ll be dealing with the consequences for years to come.

Until next time,

Jordan Eliseo
Chief Economist
ABC Bullion

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