Precious metal prices have eased this week, despite the ongoing drama in Greece, which many thought would have lent support the precious metal market. Indeed it’s been downhill for most of the week, despite a brief rally Monday, with the price of gold testing USD $1155oz overnight, before stabilising somewhat.

AUD Gold briefly went above $1550oz earlier in the week, though has since pulled back to $1530oz, whilst silver is sitting at AUD $20.74oz. The lack of upside movement in gold this week has frustrated many investors in the sector, who thought the price in USD would surge past USD $1200oz, with safe haven buying set to propel prices higher.

It hasn’t eventuated though, and bears are now suggesting gold is sure to sink further in the coming weeks, with the argument being that if Greece isn’t a catalyst, nothing will be. Mark Hulbert offered a more interesting take than this, pointing out that gold market timers are still too positive on the prospects for the yellow metal, and that a stronger upward trend will only eventuate once these people have thrown in the towel re the metals prospects.

You can read more about that here.

And whilst we personally would have liked to have seen gold rally this week, we’ve used the weakness as the opportunity to top up our SMSF with some more bullion, as we prefer to buy into weakness. It is also worth pointing out that it’s been a volatile week for most asset markets, with the ASX falling below 5,500 points at one point, equities the world over rolling over then rallying, and crude oil and iron ore getting hit hard too.

And whilst market attention has been overwhelmingly focused on the Greek crisis, what is happening elsewhere shouldn’t be ignored, with the latest US non farm payroll report, released overnight, showing just 223,000 jobs were created in the month of June.

Whilst this number was largely in line with expectations, and whilst the unemployment rate dropped to just 5.3%, it was an overwhelmingly mediocre print, with revisions, wages and the plunging Labour Force Participation Rate (LFPR) all of concern.

Looking at revisions first, the April and May reports were both adjusted lower, with some 60,000 less jobs created than what was originally reported. Wage growth was non-existent too, disappointing analysts who were expecting a 0.2% monthly increase.

The major lowlight of last night’s data releases though was the plunging LFPR, which fell to 62.6%, the lowest level since 1977. It is a good sign 223,000 Americans were able to find a job.

It is a devastating sign that 640,000 of them gave up looking for work, with the following chart, which plots the civilian employment to population ratio and annual change in hourly earnings highlighting clearly the lack of real recovery in the American economy ‘post’ GFC.

The mediocre employment data released overnight from the United States dovetails in with a lot of other indicators released this week regarding the world’s largest economy.

Whilst there were some bright spots, we also saw

• Pending home sales rise 0.9% for May, lower than forecast

• Year on year house price increase (Case-Shiller) of just 4.9%, with the market expecting a higher print of 5.5%

• A Chicago PMI result that fell below 50

• Factory orders falling 1% for the month of May. Year on year they’ve now dropped over 6%, the kind of result that has never been seen outside of a US recession

The latest round of disappointing data will no doubt help convince the Federal Reserve to hold off on that much anticipated interest rate hike. Following conventional theory for a moment, with wage growth non-existent, core inflation contained, and rising financial market risk across the globe, there really isn’t a strong case for rate hikes, especially when every other major central bank in the world is in easing mode.

Tepid economic news hasn’t been limited to the United States either this week. In Australia this week, we’ve seen new home sales fall 2.3% for the month of May, the AiG Performance of Manufacturing index tumble to just 44.2 points, and our trade balance coming in with another deficit, this time to the tune of some 2.7 billion.

Whilst this was an improvement on June’s figures, it was almost all due to a decline in imports, which fell 4% for the month, due to a large decline in capital goods imports. Services sector data was a little better, though there was a huge contraction in employment in the sector, at least according to the latest AiG survey results.

Finally, retail sales, which were released this morning, missed expectations by quote a margin, rising by only 0.3% for the month. Annual figures are looking particularly troubled in Queensland, Western Australia, and the Northern Territory, not a great sign when the mining capex bust is only starting to work its way through these states.

The only bright spot for the week regarding the Aussie economy was the surge in building permits, which were up 2.4% for the month. We really have bet it all on housing down under (more on this below)!

Gold: Steady if not Spectacular

Despite the soft tone over the last week, AUD Gold put on a respectable 4.40% for the first 6 months of 2015. Were this performance to repeat itself between now and December, precious metal investors would end up enjoying another year of steady returns, with annual performance pushing 9% again.

For the full financial year – gold in AUD was up 10.40%, rising from $1393oz to $1537oz. That’s a very solid return for precious metal investors, with the yellow metal again outperforming the Australian stock exchange, which was up just 5.7% for the financial year.

And less you think the precious metal market has been volatile, spare a thought for equity investors, who’ve had to live with see-sawing returns as well, as the below chart from CommSec, which plots the ASX 200 performance for the past year, highlights.

As you can see, the market was fairly volatile in the back half of 2014, before rallying strongly in the first 3 months of 2015. But since the RBA first cut rates in February, the market has been particularly volatile, with bank shares correcting, and the index dropping back below 5,550 points.

According to CommSec, government bond returns were up by 5.8 per-cent for the year too, so gold in AUD outperformed cash, equities and fixed income yet again, something worth keeping in mind when assessing performance for the various assets in your portfolio.

The steady returns of the past year that I’ve highlighted are not to diminish the potential for more volatility in gold, especially in the short term. The outlook, in USD especially, is clouded at best, with twice as many bears as bulls according to the latest Bloomberg survey. Prices could well ease further in the coming weeks and month.

But gold is doing the job it should be in a portfolio right now, as the last year of data highlights. Were a capitulation sell off to eventuate, we’d use it as a buying opportunity, especially as we expect the currency dynamics to play in our favour over the medium term too.

Gold Volumes Up – Even if Prices Static

Despite the fact recent price action in USD has been somewhat disappointing for precious metal bulls – volumes are definitely up, indicating a keen interest in the sector amongst retail investors.

That much was obvious when looking at the latest statistics for the US Mint, who sold 76,000 ounces of gold in June 2015, as well as a cool 4.8 million ounces of silver. Those numbers are up 260% m.o.m and 56% y.o.y for gold, and 140% m.o.m and 80% y.o.y for silver, indicating robust demand for the metals. You can see the US mint’s statistics here.

Here at ABC Bullion, we’re witnessing a major increase in volumes, particularly amongst SMSF investors. In conversations with these clients, they’re typically looking for gold as a diversifier against property and equity markets, though frustration with RBA rate cuts features prominently too. Volume from this set of clients has grown four-fold in the last six months alone.

On the ETF side of things, there were inflows of almost 200,000 ounces in the week to 26th June, with concerns over Greece no doubt partially responsible for the rise.

Year to Date, this puts ETF holdings some 200,000 ounces below where they started, with Q1 2015 the first quarter of inflows in over 2 years. The picture for ETF investments in gold is perhaps best summarised by the below chart put together by the World Gold Council in late June.

In total, ETF holdings are now more than 1000 tonnes lighter than where they were by 2012, when in total, gold holdings through these vehicles hit 2,900 tonnes. Obviously the number can still go lower, but it’s a good sign that a lot of the froth in the gold market is now well and truly gone, suggesting a more stable base to build from.

Property Bubbles – At Least According to Google

This week’s market update will finish with a look at a matter that isn’t directly bullion related, though it does tie in with why physical precious metals should form part of any prudent investors portfolio.

And the subject is the Australian housing market. In the last few years, as we all know, Sydney property prices have soared higher, with RBA Governor Glenn Stevens stating that the market action is crazy, APRA looking to rein in investor loans, and even Treasury Secretary John Fraser stating that Sydney property is ‘unequivocally’ in a bubble.

Against this, plenty of people who make their living in the property market, as well as a number of bank and mainstream economists, state that there is little to fear. Key to this argument is them pointing out that with record low interest rates and relatively low unemployment, housing is still affordable, and there is merit to that argument, especially as rates are likely to go lower still in the coming months and years.

We won’t spend a huge amount of time discussing our thoughts on the housing market, and the true picture regarding affordability, as we’ve done that here in the past. We’ve also discussed our thoughts on negative gearing here, and why ending it for property investors may not be the panacea many hope for in terms of limiting house price growth.

Instead what we wanted to share with you this week was a very simple piece of qualitative analysis regarding the Australian housing market, based on the following image, which comes from Google Trends.

It shows how many people searched terms like “housing bubble Australia”, and as you can see, it surged to levels never seen before

You can access the article that includes the above chart here.

Some other ‘highlights’ from the month of June when it comes to Australian housing were the statements from the OECD that housing in Australia faces a sharp correction, whilst even PIMCO, the worlds largest bond fund manager, stated that Australians were “irrationally exuberant” when it came to property.

Finally, we also saw the latest stats from the RBA, which showed that household debt has now hit 155.9% of disposable, a record high.

What is also interesting about the chart above is the inclusion of the United States, for as you can see, there was a noticeable spike in the number of people searching for a US Housing Bubble back in 2005 and 2006.

Turns out all those people reading about it were onto something, for as we all know, the US property market did indeed crash soon after.

The potential for a material decline in house prices clearly grows by the day in Australia. Were it to occur, it will not only impact household balance sheets, but broader Australian corporate profitability, and the value of the ASX, which has already been under some pressure in the last few months. Cash rates will inevitably be cut further should this eventuate.

Physical gold and silver would be very useful assets to own in such an environment.

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.