Precious metal prices eased this week, as market participants breathe a sigh of relief at the end of what has been a truly forgettable Q3 2015. Stating the week out closer to USD $1150oz, gold has fallen some 3%, though its still sitting above USD $1110oz, whilst silver is off just over 2% over the same time period.

In Australian dollars, physical gold can now be picked up for just under $1600oz, whilst silver is sitting just below $21oz.

There is of course the potential for some more volatility in the next 24 hours, with the much awaited non-farm payroll report due out in the United States. We’ll buy on weakness if the metals dip any further.

This weeks report looks at a number of developments over the past seven days. These include;

• The huge sell off in stocks in Q3 2015

• An update on the Indian Gold Monetisation Scheme

• Central Bank buying of Gold – and Australian Dollars

• Gold in SMSF Portfolios

We will also take a quick look at the drumbeats for more QE, which grow ever louder.

All The Worlds Gold Gone – Twice Over!

As any Australian with a regular superannuation fund will soon find out, Q3 2015 was a truly awful period for risk assets. The ASX 200 plunged through 5,000 points on a couple of occasions, and ended up down several percent for the quarter, a performance that was mirrored (or worse), in most developed markets the world over.

Emerging market stocks had an even rougher time, as fears over Chinese growth, a potential Fed rate hike, and whether or not the commodity crash would cause the next GFC all played on investor sentiment.

As the following graph highlights, the value of global equities fell from over $70 Trillion to under $60 Trillion in the past 3 months alone.

It is the worst quarter for equity markets since the GFC.

As a way of visualising how much ‘wealth’ destruction that is, consider that is equivalent to about 8 years of total economic output from Australia.

Another way of picturing it is to realise that $13 Trillion in lost ‘wealth’ is the equivalent of 2 x every ounce of gold that has ever been mined and in existence today falling to a price of ZERO, something a handful of neo-Keynesian economists would no doubt cheer on.

We also saw continued volatility in commodity markets, many of which have fallen to the lowest level in years. Indeed by the middle of August, the Bloomberg Commodity Index of 22 raw materials (including everything from oil to metals), fell to its lowest level since 1999.

Gold held up far better amongst this carnage. Whilst it eased in USD, it more than held its own in most currencies, including Australian dollars, where it was up by 5% for the quarter.

You can read more about the crash in global equity markets here.

Indian Gold Monetisation Scheme

India’s gold monetisation scheme, which aims to ‘unlock’ the over 20,000 tonnes of physical gold held in Indian households looks like its finding some fans in the jewellery market.

A report this week from the Economic Times in India suggested that some 20,000 jewellers in the country are planning to approach the Reserve Bank of India with a view to joining the scheme

Whilst the plan still appears to be in its infancy – we will watch it with interest. As we’ve mentioned before, of course the scheme will introduce counterparty risk to participants, but gold is money, and there is no reason individuals shouldn’t be able to deposit it in exchange for an income stream.

On that note, it’s interesting that the interest rates mentioned in regard to the scheme are between 2.5 and 4 percent. That’s comfortably higher than what paper money deposited in a bank in the entire western world will earn you these days.

You can read more about it here

Central Banks Buy Gold – and Aussie Dollars

Not that it will be news to followers of the precious metal market, but this week we’ve seen further confirmation of the appetite for physical gold on display by central banks of both China and Russia.

Russia added 31 tonnes for the month of August, one of the highest levels of monthly buying on record, proving their quest for more diversification in their international FX reserves continues, not to mention the political implications of such a move.

The PBoC added 16 tonnes to their stockpile, with their official holdings now sitting at 1694 tonnes. Announcing monthly additions (which look like they’ll come on between 150-200 tonnes for the year at their present pace) now seems regular practice by the Chinese, after several years of silence.

Alongside other central banks, it could well mean that total central bank demand for physical gold nudges 600 tonnes for the year.

There are a couple of articles you can read on the matter here, and here.

Of perhaps more interest though than the gold purchases by central banks of late though has been the voracious appetite for Australian Dollars they’ve been showing.

Indeed despite the clear end of the mining boom, a potential peak in Australian house prices, and a number of headwinds that WILL see Aussie cash rates head lower, foreign central banks are buying AUD with both hands.

That much is made clear in the following chart, which is based on the latest IMF data.

As you can see, AUD reserve currency holdings have now topped $125 billion, up $15 billion since the start of the year. This is quite extraordinary when one considers how far the currency has fallen, and one does wonder where Australian bond yields, as well as the local currency would be, were it not for this foreign central bank bid.

Should this buying abate, it portends a much lower AUD in the future, which of course will benefit Australian dollar precious metal investors.

You can read more about it here

Gold in SMSF Portfolios

In what has been a terrible quarter for equities, and a solid one for physical gold in AUD, we were glad to see some more decent coverage about the opportunity that comes from owning gold in a SMSF.

The attached piece, contained in SMSF magazine, covers one of the great reasons to own gold in a SMSF, which is the opportunity for outsized gains. Whilst inflation protection, diversification, and a natural currency hedge are the primary reasons to own precious metals, the opportunity for large gains also shouldn’t be ruled out.

This is especially relevant now – when bond, equity and property markets are trading within sight of, or at all time highs. Indeed, in this piece from early September 2015, Deutsche Bank argue that bonds, equities and housing are at 200 year highs in the 15 developed market countries they had 200 years of data to look at.

The chart below highlights these valuations, and the precarious position financial market investors find themselves in.

Call us over simplistic, but if major asset markets, where $99 out every $100 of investment currently sit are at 200 year highs, then perhaps there is more upside in unloved and under owned precious metals.

We’ve topped up our own SMSF this week accordingly

The drumbeats of QE grow louder

The last few years have seen central banks take what were previously thought to be unthinkable actions, all in the name of ‘stabilising’ the financial system, and stimulating the economy.

The futility of this, and its unintended consequences is something we will discuss in more detail shortly, but we did want to briefly mention the noticeable increase in calls for more QE of late.

And it is clearly one of the reason we remain bullish on gold and silver long term, with a note from one of the world’s largest investment banks last week discussing

• Yellen failing to raise rates

• Draghi wanting to ease further

• Japanese politicians wanting more easing

• China discussing more easing

• Haldane at the BoE discussing negative interest rates

In short, the drumbeats for more QE, and even easier monetary policy are growing louder, despite the many protestations from politicians, economic forecasters and market analysts that 2015 would see a return to more sustainable growth and more normalised monetary policy.

That has been thrown out of the water – with HSBC discussing the four alternatives for the “next QE” this week.

You can read more about it here

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.