Gold Hits 2019 Bottom - What’s Up?

Precious Metals Commentary

Gold failed to hold the recent support level of USD$1,280 this week so we saw some selling purely on the back of the technical setup, as news was fairly absent this week. Stop losses aplenty would have sat just below this level for speculators long gold, so triggering of stops provided a quick sell-off down to the lowest price of 2019, USD$1,274 per ounce. Silver didn’t quite react as much and trades at the same price this time last week at USD$15 per ounce at time of writing.

The sell-off in gold coincided with a little USD strength but the AUD/USD has held up for now and trades at $0.717 US cents, with gold trading at AUD$1,777 and silver $21 per ounce.

The gold chart below sees the current setup in USD terms and the break through support. Next support levels to the downside would sit and the uptrend line from 2018 around $1,260 and then the psychological level of $1,250 failing that.
 

Generally speaking, psychology when it comes to financial markets often works backwards to how we think of retail products and prices. When the price of a television goes lower, we want to buy it, but if the price of a stock, commodity or any other investment goes lower, the counter-intuitive response for the average investor is to get scared and either sell, or simply not buy.

We on the other hand prefer to buy oversold levels when they do arise, and to let Gold Saver do the rest in the background buying indiscriminately to build a long-term position.

For our regular readers, the below chart will be very familiar as we at ABC Bullion tend to use this example time and time again to highlight the best times to top up one’s portfolio without emotion getting in the way. Price action dictates short-term sentiment for gold possibly more than any other factor, which is why we have some pretty large intra-year swings in the price, and the below indicator usually only signals a buy sign a few times a year.

The chart below is gold in AUD terms and is a weekly chart for a more longer-term view which covers the last 2 years. My favourite technical analysis tool for timing gold purchases at the bottom of the chart is known as the Williams % Range Momentum Indicator, and this is a very simple technical indicator that highlights areas where the price has moved to either overbought or oversold levels.

I’ve circled below the times in the last few years where the indicator has been oversold and the theory says these are the best points to buy. Recent signals going back in time would have had one buying at $1,620, $1,575 and $1,600 respectively. Not bad.

So we can see we have just broken into oversold territory, but this is not to say prices can’t continue lower in the short-term.
 

Technically speaking, the momentum indicator flashes a buy signal when we break back up through this -90 level to highlight a change in momentum from heavily oversold levels (something we are yet to see), but usually dollar cost averaging into areas where the weekly chart signals oversold, should give one a good average price.

We much prefer these spots to when the price is taking off to the upside. Any short-term jump in the AUD/USD should also be taken advantage of from here.

Insane Interest Rates

With everyone being so hyper connected these days, we can fall into the trap of responding to daily news and missing the bigger picture. The picture of interest rates doesn’t get any bigger than the chart below, going back to 1790.
 

While we have seen a move up recently, are our current economic circumstances – on par with WW2 – as bad as it was during a World War? The chart also puts the post war period in perspective, relative to a mostly gold standard based economy, pre-Federal Reserves System.

John Abernethy (Clime Asset Management) is scathing of our current situation, seeing negative interest rates in Europe and Japan as “an act of economic insanity” that does not stimulate business confidence, yet punishes savers and investors.

James Grant, editor of investment newsletter Grant’s Interest Rate Observer, agrees. He was critical of central bank suppression of interest rates in a recent interview, noting that it disadvantages savers and favours speculators (and borrowers, of course).

He quips that gold is a high yield asset on the basis that its zero interest rate is greater than 11 trillion dollars’ worth of bonds that have negative yields, and believes that “gold is an attractive and rational alternative to these monetary shenanigans and to the consequences of ten years of artificially imposed ultra-low interest rates”.

He doesn’t give a timing when gold will pay off, but says it needs to “prove itself above $1350 or $1400 per ounce”.

Zooming in closer on the interest rate picture, the chart below from Otavio Costa (Crescat Capital) looks at interest rates since 1980 but on a log scale. This change of perspective reveals a multi-decade resistance line with Otavio, noting that interest rates hit this line only 3 other times in history, which were all followed by a major bear market and recession.
 

John Mauldin (Mauldin Economics) sees central bank suppression of interest rates as a form of helicopter parenting, that while attempting to protect the economy from a recession actually ends up being counterproductive, because it distorts pricing signals and incentives that capitalism needs to function. He doesn’t “see any way out. A much bigger crisis is coming and it’s going to hurt”.

Volatility

As insane as interest rates currently are, it doesn’t compare to cryptocurrencies. The Bank of England had a blog post this week comparing Bitcoin’s volatility with other assets. The chart below shows how much you can lose (VaR = value at risk) over ten days, 99% of the time.

We aren’t so much interested in the cryptocurrencies, which not surprisingly, are very volatile. What we did find interesting is that gold has the same volatility as the least volatile UK company share – in this case, that 99% of the time the 10-day return on gold would be no worse than a 10% loss.

 
Compare that to the most volatile stock, where 99% of the time you could lose up to 37% over ten days. While this analysis was only based on data from July 2010 (the date Bloomberg’s crypto data started), it is another example of the benefit of having gold as part of your portfolio.

Candid Central Bankers

We came across these Federal Reserve oral history interviews that were done as part of the centennial anniversary of the Federal Reserve in 2013. We have had a look through a few, the only two of interest are those with former Fed Chairmen Paul Volcker and Alan Greenspan. Together, those two total 575 pages, so unless you have a lot of interest in monetary policy and a lot of time on your hands this Easter, below is what we consider the key quotes. Most of them are self-explanatory but we’ve included some editorialising in square brackets.

Volcker on the Hunt Brothers and the Silver Crisis

There had been a big run-up in the prices of silver and gold. The price of silver went from $5 to $50 an ounce. … I got a call that I needed to talk to so-and-so in the market. So I did, and the person on the other end said that I had to do something: I had to close the silver market, because Bache [Bache Halsey Stuart Shields] was going to go broke. … Bache had been the principal banker for Bunker Hunt; Bache had all these loans secured by silver. As the price of silver went down, the margins were lost, and Bache was selling silver. If the silver price went down any further, Bache said, the loans wouldn’t be covered, and it would go broke. … Anyway, after much discussion, we decided to do nothing. We weren’t in charge of the silver market anyway.

In September, we had said banks shouldn’t make speculative loans. At this point, the market was still very fragile. A Texas banker had the idea of consolidating all this lending to the Hunts and stabilizing it; the banks would all get together to deal with Bunker Hunt in a coordinated way. … But we all blessed their proposed arrangement to consolidate the outstanding loans, which seemed to make sense, if we got Bunker Hunt sufficiently locked in.

[For another side of the Hunt Brothers story, see this ABC Bullion article or this Youtube interview.]

Greenspan on the Gold Standard

“Once you’re off the gold standard, there is no mechanism in a fiat currency system other than the central bank to determine how many claims you print.
The central role of monetary policy is to try to replicate what the gold standard did without the gold standard problems.
A central bank can quash any expansion, any inflationary process … The reverse is not true, namely that, if you expand the money supply, things will get better—although that is the conventional wisdom.”

[The above quote is from April 2011. In recent years we have certainly seen attempts to “make things better” with little result, as Alan had predicted.]

_“We abandoned gold basically because the inflationary policies of the previous period had created too many claims in dollar assets relative to our stock of gold … the very first signs of it were in the Kennedy Administration, where we had a little blip up in the $35 announced price of gold, which then got suppressed successfully.

Under the gold standard, because gold was the essential basic reserve of the banking system, the supply of gold essentially determined the amount of credit or money that was created and, therefore, kept the price level essentially stable.”_

[I mean, who would want stable prices? Crazy. Better to have our cost of living going up by 2% a year. /sarcasm]

“Unquestionably very large deficits put very extraordinary pressures on central banks to expand and essentially at the end of the day, over the centuries, monetize the fiscal deficits.”

[The above quote is from August 2012. Today we have aggressive monetisation of fiscal deficits on the table with Modern Monetary Theory in the limelight.]

“Under the gold standard, because gold standard reserves are limited … if governments ran a deficit, what they would end up with is higher interest rates … but you would not end up with inflation.”

[Pop quiz, which class of people would not like higher interest rates but like inflation? Answer: borrowers. And who likes higher interest but not inflation? Savers. This quote from Alan summarises neatly the political nature of a “hard money” gold standard versus “soft money” fiat. One favours savers, the other borrowers.]

“If you do not have a gold standard, the only restraint that exists in the United States is in the FOMC. It makes the judgments as to how much of the monetary base, which is essentially the equivalent of the gold reserves, gets created.”

[The above reminds me of this George Bernard Shaw’s quote: “You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.”]

Until next time,
 
John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.

Disclaimer
This publication is for educational purposes only and should not be considered either general or 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, and 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.