In last week’s report we discussed whether or not precious metal investors would receive a golden egg over the Easter weekend. Good Friday’s very bad non-farm payroll report ensured that this was so, with USD Gold prices pushing up toward the USD $1215oz mark earlier this week. Silver originally rallied too, with the little cousin of the precious metal complex trading near USD $17oz too.

Since then, the bounce has faded, with gold now trading back below USD $1200oz, whilst silver is closer to USD $16.30oz, as a renewed USD strength had quelled demand for the precious metal complex.

For Australian dollar investors, gold has given up close to $50oz this week, after pushing up towards the $1600oz mark originally. This has been as a result of both the pullback in USD gold, and the rally in the Australian dollar over the past few days.

That Aussie dollar bounce was largely a reaction to the Reserve Bank of Australia’s surprise (according to the market) decision to keep interest rates steady at 2.25% at its meeting earlier this week. Declining business and consumer confidence, coupled with an iron ore price below USD $50 per tonne had led most in the market to expect the bank to cut rates, but their obvious (if unstated) concerns about a Sydney housing bubble led them to hold the line. A rally in the Aussie dollar, and a pull-back in the local share market was the end result, though how long that lasts remains to be seen, with expectations still strong that the RBA will lower rates all the way to 1.5% by the end of 2015.

Back to gold, and we’ve seen softer demand out of Asia, with the Shanghai premium dropping into negative territory, whilst ETF demand remained lack-lustre, with holdings to the 3rd April dropping by some 40,000 ounces.

The rally in the metals earlier in the week was therefore driven predominantly by some short-covering amongst the speculative community, though the lack of flow through, especially in light of just how bad US data is turning should be of concern to the bulls.

Short term –headwinds to further gold price appreciation remain. The metal failed to push through earlier resistance just above USD $1220oz. The technical outlook is also cloudy at best, with RSI looking like it might roll over, as it did back in December last year.

The chart above shows gold over the past few months, and plots both RSI and MACD. It will be interesting to see what happens with RSI in particular over the next week or so, with it looking critical that gold can hold above USD $1190oz if it hopes to push higher.

The pullback in silver is also of concern, as you will typically see silver outperform gold in environments where the entire precious metal complex is strengthening.

On the plus side, US macro data continues to underwhelm, with the payroll data a huge warning sign to those who argue the US economy is decoupling from the rest of the world, and is on the road to a sustainable recovery.

It wasn’t just that the headline number missed by over 100,000 jobs, which was bad enough. The participation rate also fell, whilst there were negative revisions to previous months data.

Whilst there are many who will argue this was a ‘rogue’ print, a weakening in payrolls would align with what we are seeing elsewhere in the US economy, with data continuing to underwhelm.

On that score, whilst the outlook for gold is clouded short-term, selling all positions in the hope of a cheaper entry point in the future would be fraught with danger. Longer term investors would still be best dollar cost averaging, for there are a number of supportive factors underpinning the market.

Firstly, unlike silver, positioning in the gold market is hardly exuberant, with little enthusiasm for the metal. The lack of bullishness is a good sign for a contrarian investor, and is typically a much better buy signal than it is a sign to sell, or lighten exposures.

Confusion about when, or indeed IF the Fed will hike this year continues to grow too, with the market now expecting a Fed hike in September at the earliest. This week we even had Fed uber-dove Narayana Kocherlakota state that “expanding asset purchases” could be necessary if data continues to disappoint. That will be music to the ears of gold bulls, as QE4 should see some support for the metal.

Kocherlakota has also stated that even talking about raising rates is acting on a drag on the economy. Effectively, in this brave new world even “talking is tightening”.

Some Bullish Views

There are a handful of bullish views on where gold is heading, some of which we have shared. First up is HSBC, who stated that “Gold’s break over the technical 50-day moving average of US$1,209/oz and 100-day moving average of $1,212 an ounce may have invited buying from momentum investors,” before going onto note that “Furthermore, a weaker U.S. dollar provided underlying support for bullion. There may be more scope for bullion to rally, in our view.”

QMG Pty Ltd Technical Analyst Angela Mangan is another with a positive view, stating two days ago that: “The spot gold price previously generated a technical buy signal @US$1235 on 9/1/15 and subsequently reached the minimum upside technical target located @ US$1290 on 21/1/15, completing the technical trade. As a result of the recent price action, a new upward reversal / upside break above key resistance has occurred, thereby generating a new technical buy signal. The potential now exists for a further significant rally to occur in the gold price from current levels.”

Finally, Todd Colvin, senior vice president of commodity trader Ambrosino Brothers is another who sees further upside, telling CNBC that; "I think gold is a big buy here with all you don't know about what the Fed's doing, what you don't know about what's going on in the Middle East, and as a buy-and-hold instrument."

Whilst noting that gold isn’t something you can retire on (due to the lack of yield), Colvin at least acknowledged the lack of return, and implicit risk on other markets, nothing that; “when you look at yields in the U.S. at 1.85 percent for 10-year Treasurys, and stock markets at their highs, I think you should put a little money away [in gold] and come back to it when you need it,"

That is a strategy that we strongly agree with at ABC Bullion. Whilst we are resolute in our belief that physical gold and silver will outperform traditional assets in the years ahead, as well as minimise risk, we’ve never seen precious metals (nor any other market for that matter), as “all or nothing” investments.

Gold in the Asian Portfolio

Whilst the ever growing wealth and influence of Asia in the global economy, nor their penchant for gold investment is hardly news, I did come across an interesting read worth sharing this week. Titled “The Importance of Gold in the Asian Portfolio”, the article commented on the key role gold can play in the portfolio of Asian high net worth investors, and why it was critical that anyone in investment management and banking who hoped to service this growing clientele understood the role of gold, and why physical gold was best.

The article, included three interesting quotes from Allocated Bullion Solutions CEO Seamus Donoghue, which are worth sharing. Donoghue stated ;

• “If we look at Singapore, which has the most developed banking sector in South East Asia, only a handful of banks offer any client solutions around physical gold. They may offer paper gold but a cash settled product is not the same as a physical gold investment,”

• “Clients in Asia buy gold to own it - it is effectively viewed as a second currency in most of the region and given the bank’s have few client solutions in the physical product clients have had to source through more traditional suppliers such as the gold and jewelry shops which charge a tremendously high margin for what should be a commoditized product,”

• “Every private banking is looking to gain AUM. Gold is an easy win as it is very sticky and clients in Asia buy gold year in and year out. Private clients are buying physical gold but not through their private banks. The value proposition to clients is a more cost efficient and efficient process that has two-way liquidity and that can be integrated into their overall portfolio. Physical gold is an easy win-win for both client and bank.”

You can read the whole article here

Coming up Next Week

Next week, we’ll see two data points that are likely to move currency markets, and impact precious metal investors. In Australia, the key data release is going to be the employment data, with all eyes on what happens to the unemployment rate. There has been much confusion as to how accurate these figures have been of late, but there is no doubt the trend has been worsening substantially in the past few months. Alongside this, we also see business and consumer confidence figures in Australia. If they remain tepid, and if the unemployment data shows a worsening trend, then it will be almost certain that the RBA will cut cash rates in May.

Were that to happen, or even if the expectation of it happening strengthens, then we will likely see the Aussie dollar start weakening again, helping to support the gold price for local investors.

Over in the USA, all eyes will be on retail sales, which have performed very poorly of late. With the latest weak set of payroll numbers, it will be interesting to see where this number lands this month. If it is another “miss”, then expectations of a Fed rate hike will be pushed back further. Of less importance (at least in my mind), will be the CPI numbers, with official inflation in the USA not only contained, but likely to remain low considering the battering oil prices have taken, and the strength of the US Dollar.

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.