Gold: It’s Worse than it Looks!

Precious metal prices have consolidated this week, with gold still battling to decisively reclaim the USD $1,300oz level. Silver has had a better time of it, rising nearly 2.5% in the last week, with industrial metals showing some relative strength, whilst futures market participants have stepped up their long exposure, adding further upside pressure for silver.

Sentiment for the sector as a whole is still incredibly low (more on this later), even though there is plenty of news flow that will prove supportive for precious metals, including the continued shenanigans in Italy.

We’ve also seen some encouraging flows in the gold ETF space, where net inflows last month totalled over US $750 million. Given North American ETF flows were actually negative for the month, the net inflows are a testament to the nervousness amongst European investors, and their desire to hold gold as a portfolio hedge in the current political and market climate.

Added to this is the news that the Swiss government pension fund is looking at investing some $700 million gold, preferring to hold physical bars rather than getting a synthetic or financialised exposure via swaps or futures and options contracts etc.

Searches for Buy Gold

Despite the encouraging ETF flows and moves by pension funds to make portfolio allocations, however modest, to gold, there is no doubt that gold has fallen off the radar for most investors in the past year or so.

Evidence of the tepid demand for bars and coins is been everywhere, including sales of minted coins that are at decade lows from some of the worlds leading mints, premiums for coins that are substantially reduced compared to long run averages, and buyback ratios as a percentage of total turnover which are close to record highs, including here at ABC Bullion.

This week we saw another example, with a great article in Forbes discussing the fact that google searches for “buy gold” have hit an 11 year low, back to where they were in the lead up to the Global Financial crisis.

The chart below, which overlays searches for “buy gold” alongside the USD gold price since 2004, shows the explosions in interest for gold buying that we saw when the GFC hit.

You can see it again in 2011, when the price hit all time highs in USD, and again in 2013, after the sharpest gold price falls seen in decades saw an explosion in interest, with ABC Bullion seeing so much demand at the time we had to regularly ask clients to line up in the corridors outside our office.
 

That was years ago though, and as the chart also highlights, since 2013, there has been a steady decrease in the volume of people searching “buy gold” on Google, though there was an uptick in 2016 which coincided with Brexit and the US election.

There is no two-ways about it, this data is concern, and in some ways, when you consider how many more people use Google as a regular part of their everyday life today compared to 2007, the picture is in some ways worse than it looks.

To reflect on that, think back to just how more “mobile” we are today relative to 2007. Back then I use to catch the Tube to work in London, and would typically read one of the free newspapers, and/or read a novel.

Today, I catch a bus to work in Sydney, and have used Google, Twitter, WhatsApp, Gmail, my work email, and have read the news all before I’ve arrived in the office.

At a guess, I’d say my personal usage of Google has gone up by a factor of 10 in the last decade, so the fact that there are less Google searches for “buy gold” today than there were in 2007 is quite incredible.

There is one important caveat to what I’ve just covered that is worth addressing when it comes to this data. The first is that whilst Google has come to dominate the eyes of the world when it comes to internet searches, “investment eyeballs” as it were can find out a lot more information about various asset classes (including gold) from the proliferation of financial services product providers that have popped up over the last decade.

As an example, on my iPhone – I have installed the IG Trading app, which has information on gold, and the ability to trade gold products. The image below, which comes from a very innovative Australian based stockbroker called “Stake”, is a screenshot of what a user will see if they want exposure to gold.

Source: Stake

The point I’m making here is that relative to a decade ago, there are likely lots more people getting information about investing in gold (or more accurately, gold products) through various financial platforms, rather than them having to do a Google search and seek out a bullion dealer specifically.

For precious metal investors, the most important point to keep in mind is that it is actually a very good, and very bullish sign that interest in the sector is at a low point.

Look at that explosion in interest around the time of the GFC, and especially in 2011. Ideally you would have bought your gold well before the GFC, and you definitely didn’t want to be buying back in 2011, as the market was about to embark on the much needed multi-year pullback and consolidation we saw between 2013 and 2015.

Boring markets are where the bargains are to be found. This lull in precious metals should be embraced!

Core Inflation Rising – Jobs as Good as it Gets!

Whilst it's still at historically low levels, inflation in developed markets is starting to stir, as the following chart from Deutsche Bank indicates. Sticky inflation in particular is now well above 2%, whilst core inflation is also on the rise.

Higher levels of wage growth, as well as the fiscal stimulus that is being thrown into the mix should see this inflation trend gain strength, which will be gold supportive, especially if the Fed undershoots market expectations regarding policy tightening. Given the flattening of the yield curve, there is a good chance the Fed will end up being more cautious than they’d like to be.

On the jobs front, it is undeniable that there has been significant labour market strength on show in the US, with the unemployment rate falling to just 3.9%, a 17 year low, with more job openings advertised than there are people that are unemployed.

The glass half full interpretation of this is that it's a sign of how well the US economy is doing. The glass half empty, with an eye on history interpretation is that employment is generally a lagging indicator, and an unemployment rate as low as it is a strong indicator of how late cycle we are in the United States, and why a recession is likely on the cards in the not too distant future.

As mentioned earlier, the unemployment rate is at a 17 year low, which was back in 2001. That was around the time the stock market was crashing, and gold was beginning its decade long-bull market that saw prices rise from below USD $300oz to over USD $1,800oz.

Australia: GDP Strong - Housing Hammered!

It’s been an interesting week for Australian economic data. GDP beat market expectations, coming in at over 3%, whilst retail sales were also up 0.4% for the month - double what the market was forecasting.

Impressive numbers no doubt, though as is now well understood, GDP growth per capita in Australia is far lower, with a large part of our headline growth purely immigration driven.

Even the retail sales growth was predominantly driven by the “needs to have” rather than the “nice to haves”, another indicator of how squeezed households are in an era of record household debt and record low wage growth, a situation now being exacerbated by a weakening in employment trends.

Going forward, the situation is likely to deteriorate, as the East Coast housing market is not only weak, but weakening, with auction clearance rates in Sydney falling below 50%.

At a headline level, falls in nationwide house prices have been relatively benign, but in parts of the country, the situation is already quite dire. The chart below shows the decline in values to May 2018 in major Sydney regions, showing the up to 20% falls in unit prices in Baulkam Hills and the Hawkesbury, and the 10-14% falls in house prices in the inner west and city of Sydney.
 

Source: Core Logic

At a personal level, this data “feels” right, as apartments in the very complex I live in in the inner west of Sydney (Balmain Shores) seeing prices drop by 5%, with my inbox now filled with emails from property agents offering houses and units in the area that are “priced to sell”.

Given the units, even after a 5% drop, would only be offering a gross yield of just 3% (meaning you’re paying over 32x earnings), and that's before strata costs and other associated expenses, not to mention financing, its quite a while before we’ll be ready to buy, no matter how eager sellers are getting, and we doubt we are alone.

From our perspective, we’ll likely not look at property until the average Australian property sells for circa 200 ounces of gold (see chart below for historical chart of property priced in gold), rather than more than 400, which is the current going rate.

To help understand why the housing market situation is so positive for gold, it pays to remember that at a nationwide level, even a 10% decline in Australian property values would wipe out approximately AUD $700bn in household wealth.

That is the monetary equivalent of wiping out the entire Australian SMSF industry, which is the largest component of our AUD +$2 Trillion superannuation industry.

It is inevitable that rates would have to fall, the dollar would follow and the sharemarket (or the financials and household exposed sectors at the very least) would be in trouble too.
Precious metals would be one of the only refuges in such a scenario, and potentially a very profitable one at that.

Bitcoin

To finish this week's market update, we thought we’d leave readers with a link to two pieces on Bitcoin, and blockchain technology. The first can be found here, and is an article referencing the Dutch Central Banks findings regarding the suitability of blockchain for financial market infrastructure.

In short, they don’t think blockchain works well, citing three key reasons, namely:

• Inadequate capacity

• Inefficiency due to high energy consumption

• Lack of complete certainty about having made a payment

Of even more interest is this monster publication from Morgan Stanley on Bitcoin, which contains 50 plus slides looking at the crypto market.

Of all the charts and slides, we think the following one is the best evidence of why Bitcoin won’t last as a monetary experiment.
 

As the slide suggests, faith in one of the core tenets of Bitcoin enthusiasts, its supposedly limited quantity, is fading – as unlimited “hard forks” of Bitcoin can, and indeed already have occurred.

At the very least it indicates that unlike gold, or even fiat currency for that matter, Bitcoin isn’t “consistent”, or fungible. That alone will be enough to cause it to fall over eventually, as that is a fundamental precondition for any asset to serve as money over the long run.

Investment implications are simple. Its fine, and possibly even logical to speculate in Bitcoin and other cryptos, but only with the capital you can afford to lose.

For wealth protection, stick to gold and silver!

Until next time.
Jordan Eliseo

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.