Gold Faces the Music!

Gold prices pulled back sharply overnight, with the yellow metal declining back toward USD $1,330oz. Earlier in the week, gold had briefly pushed through USD $1,360oz, though couldn’t hold onto this important level, and is now essentially unchanged over the past seven trading days, despite the alarming developments in Syria and continued uncertainty re US trade policy.

As per the chart below, the USD $1,360oz level is proving to be particularly challenging for gold, as the yellow metal has failed three times this year to clear this hurdle in 2018.

The metal is essentially range bound between this USD $1,360oz level at the high end, and USD $1,305oz at a lower level, which provides plenty of opportunity for short-term traders, though it’s of little excitement to long-term physical metal buyers.

The latest commentary from the ABC Bullion trading team reinforces the above point, noting that; “XAU/USD: The technical ‘double top’ resistance around the USD 1365.00 level highlighted yesterday, presaged a mean-reversion move back down into the middle of XAU/USD’s broader USD 1306 – 1365 sideways range, the market holding just above the 21 Day moving average at USD 1332. It’s a ‘buy dips’ or ‘sell rallies’ proposition given the sideways price action but at current levels it’s a coin-toss as the market sits in the middle of the range.”

Importantly, gold remains above both its 200 day and 50 day moving average, which is a positive sign, whilst a look at a longer term gold chart should also provide comfort, as this recent bout of range bound trading is occurring against a backdrop of higher lows coming out of the 2015 cyclical bear market bottom.

Silver meanwhile is trading at around USD $16.50 and AUD $21.33oz, up marginally for the week, with the gold to silver ratio currently sitting around 81:1, ever so slightly down from the levels seen at the start of the month, as the following chart shows.

Crazy Night for Bitcoin!

Up until 24 hours ago, it was shaping up as another poor week for Bitcoin and the cryptocurrency space, with prices continuing the downward slide that has seen most coins shed 70% or more of their value in the past few months.

All that changed during a one hour period overnight, when the price of Bitcoin inexplicably surged by roughly 14%, as you can see in the chart below.

At this point, there is no apparent catalyst for the move, though rumour has it “Russian oligarchs” are piling into the space.

Either way, crypto-bulls will no doubt be rejoicing, as Bitcoin has (for now) moved well above the USD $6,000 level. Should it fall through there, then it really could head all the way back down toward USD $1,000 per coin, the level from which the mania last year really started.

Australian Inflation Dead?

Regular readers of our market updates will know that we think official CPI readings underestimate true cost of living pressures regular households are facing.

Nevertheless, they are what most market participants focus on, and to that end, the following chart, produced by Macquarie Bank, shows how weak core inflationary pressure is in Australia right now.

Not only has it already been stuck below the 2-3% band the RBA targets for the last couple of years, but it looks like it’s weakening, not strengthening, with the pace of quarterly inflation increases (assuming Macquarie are right) likely to have weakened for the third quarter in a row when the next set of data is released.

Whilst a low inflation print won’t force the RBA to cut rates anytime soon, persistently soft increases in CPI will definitely prove a barrier in the way of any rate hikes.

Adding to the barrier of higher rates is of course the continued weakness in the East Coast property market, which we’ve been writing about for some time.

On that note we came across this great chart from the team at CoreLogic, looking at annual changes in house prices, breaking them down between the cheapest 25% of homes, the middle 50%, and the top 25%.

As you can see from the above chart, its prices at the top 25% (i.e. higher end) that are falling fastest, with Sydney for example seeing a fall of 5.7% in the last year for houses priced in the top 25% of homes, versus the lower end of the market which was actually up 0.6% over the same time period.

What’s also interesting looking at the above chart is that the last time the “low 25%” of the market seemed to outperform the market as a whole was back in the early 2000s, likely around the time property investors stared to overtake owner occupiers as the key driver of the residential property market.

Add all this up and the key takeaway for investors is that they should ignore all the noise about potential rate hikes in Australia.

Absent a complete shock, they aren’t coming for a very long time!

Two Great Takes on Gold and Financial Markets

Before finishing this market update, we wanted to end with some links to two terrific articles we read this week.

The first, titled “Bull Market Music”, was written by Jared Dillian, who writes as “The 10th Man” over at Mauldin Economics. The article explores the link between popular culture, and the kind of music people are listening to, and how this aligns with the “mood” of financial markets and broader economic sentiment.

This rings true from my perspective, as I can clearly remember being fascinated by the performance, and more importantly, the lyrics, of the duet between British rapper Dizzee Rascal and Florence Welch (of Florence and the Machine), who combined to perform at the Brit Awards in 2010.

Here are two extracts of lyrics from the song:

People act shameless, tryna live like entertainers
Want a fat crib with the acres
So they spend money that they ain't made yet
Got a Benz on tick that they ain't paid yet
Spend their pay check in the west end on the weekend
Got no money by the end of the weekend
But they don't care 'cause their life is a movie
Starring Louis V, paid for by yours truly
Truthfully, its a joke, like a bad episode of Holly Oaks
Can't keep up with the cover notes
So they got bad credit livin' on direct debit
In debt but they still don't get
Cos they too busy livin' the high life

Again and again I see the same thing
Everybody acting like they their plane sailin'
I see rough seas ahead maybe a recession
And then a depression in whatever profession

The message of the song is clear – people have overspent, wasted their money on things they don’t need, and we are now in tougher times.

The song exploded on the charts (it was number three on the iTunes singles chart), though I am quite certain that two to three years earlier, when “living on credit” was still seen as a normal, and good thing to do, these artists wouldn’t have even thought about writing, let alone performing a song like that.

The second article that I wanted to share was written by Ross Norman, of London based gold broker Sharps Pixley. Titled “Gold Says Peak Complacency”, it looked at the dearth of physical gold demand in western markets, and why interest in gold (based on Google searches, etc.) seems to be at decade lows.

Commenting on the state of the market, Norman noted that; “If 35 years in gold has taught me anything, it is that current conditions resonate with the market of the late 70's and late 90's right before the market exploded higher - but much patience is required because if history is a guide, then it will happen precisely when you least expect it.”

The whole article is a worthwhile read, and the comment regarding patience is a particularly important one.

Whilst assets like Bitcoin offer explore overnight gains (and losses), and other markets look more exciting right now, physical precious metals are a long-term game.

They are doing their job even if they aren’t getting much attention right now. Investors in this space will likely do best by simply staying the course, and ensuring they maintain an adequate allocation to gold and silver as this economic and market cycle plays out in the years ahead.

Until next time.
Jordan Eliseo

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