It’s now just over a week since the Federal Reserve decided not to raise interest rates. In that time, precious metals have been one of the few asset classes that have responded well to the news, with the price of gold now trading back at USD $1150oz.

In Australian dollars, the news is even better for investors, with the AUD price of gold heading toward AUD $1650oz, up close to 5% for the week. Silver has responded well too, and has climbed back above USD $15oz, whilst in AUD its approaching $22oz, with a noticeable increase in physical demand for gold’s ‘poor cousin’ over the past few weeks.

Whilst it’s been a good week or so for precious metals, the news has not been so good in equity land, with the Dow Jones off close to 1% over the last 5 days. The Dow, which had traded above 18,000 points in mid July, is now off over 10% in the past two months, with that extra volatility in adding some upward momentum to gold prices.

It hasn’t just been overseas stock markets that have struggled in the aftermath of the Fed’s very dovish non-hike. The ASX has also been under pressure, closing below 5,000 points at one point earlier this week, though it’s since clawed back above that level.

Looking back at the gold market and it’s clear that some short covering in the futures market has been at least partially responsible for the uptick in prices this week, as the declining chances of a US rate hike this year (no matter what Janet Yellen said in her just completed speech), no doubt scaring a few of those who’d bet on falling gold prices between now and the end of the year.

We’ve also seen more evidence of robust demand for physical gold, with Chinese gold imports from Hong Kong hitting a 3 month high in August.

The USD $1150oz mark will no doubt prove a crucial area for gold in the coming days. And with that, lets take a look at the technical picture

Technicals and Dollar Cost Averaging

With John Feeney

Just when the USD Gold price was looking to head south and re-test the USD $1,080oz low, we’ve had a spike of around USD $50oz on the back of the non rate hike by the Fed

This rally has improved the technical setup, as we have a close above the 100 DMA. Interesting to note too that the historical net-short position of hedge funds in July/August have now reversed.

That period of course also coincided with what at the time seemed an all-time low point for sentiment towards the yellow metal.

AUD gold investors should also be keeping a close eye on the local currency.

For a look at the charts suggests it would be a profitable strategy to dollar cost average into gold on any AUD strength. You can see what is happened to the AUD over the past 12 months in the chart below

The above chart is the Australian dollar daily chart and I’ve circled all the periods of strength in the last six months.

Having an opinion that any strength in the AUD would be short lived, these dead cat bounces seem to provide good entry points.

The same periods in time have been circled on the below six month AUD gold price chart.

Putting away the same amount of funds during these periods would have minimized risk and led to an average per ounce buying price of around $1,525 over this period.

That is around AUD $120oz lower than this mornings spot price, or a gain of 7.8%.

Gold: A Lifeboat for Everybody:

On the 19th September, the Economist carried an article titled “Looking for Lifeboats”. The article dealt with market returns in ‘risk off’ environments, when equity markets tend to suffer.

Looking at research just released by AQR, the article noted that the average quarterly loss for stock markets in the worst 10 quarters between 1972 and 2014 was -19%

AQR then looked at what asset classes tended to perform best in these environments, for these are clearly the assets one would have wanted to hold, in order to protect capital.

The chart below sums up the results.

As you can see, Hedge funds did not hedge equity market risk at all, whilst corporate bonds also suffered. Indeed the best performing single asset classes in these environments were government bonds, and GOLD.

According to AQR, the only thing that would have done better than gold, which is highly liquid, easy to trade and accessible to all investors, was a five strategy composite factor involving value, momentum, carry, defensive and trend following elements.

In other words, the only thing that protects capital better than gold in risk off environments is an exceptionally sophisticated, expensive and potentially illiquid strategy. It is also a strategy that not one person in a thousand (even on Wall Street) would be able to execute.

It’s no wonder most people will just stick with precious metals.

The full article from the Economist can be read here.

The entire report by AQR can be found by searching “AQR ten worst quarters for global equities” on Google.

It will download as a PDF.

ANZ Calls for Two More Rate Cuts

Further bolstering the chances of a fall in the AUD in the coming months and years was the call by ANZ in the last 24 hours that they now expect to see 2 more interest rate cuts by the RBA, which will bring the local cash rate all the way down to just 1.50%.

This is of course something we’ve been predicting at ABC Bullion (not that we think it’s a good thing) for some time, with this piece from earlier in the year talking about a 2% cash rate with downside risk to the forecast.

That was published when interest rates were still at 2.50% and not one of the major banks or the like were predicting further interest rate cuts.

Anyhow – by changing their view, ANZ join BT and AMP Capital, with economists and fund managers from these asset managers now also openly predicting lower interest rates into late 2015 and 2016

For the record – we see rates potentially going as low as 1% by end 2016 – which will further punish savers and hurt Australia’s term deposit market. This is a subject we discussed in an article we wrote back in August 2014, where we talked about the death of Australia’s $700bn plus term deposit market.

There are two key observations that we would make in relation to the likelihood of lower interest rates in Australia

• It won’t help stimulate the economy. Of course it will make mortgages easier to service, but that money ‘saved’ will not be spent in the economy, stimulating activity and job creation. Australians are so personally indebted now – and worried about low wage growth and rising unemployment. On the flip side – retirees and those with savings – will be further punished with lower rates. A $500k term deposit that might be earning 3% now (1% above the cash rate), will likely earn just 2.5% within 6 months (still 1% above the cash rate if it hits 1.5%). That will be a reduction in income from $17.5k per year to just $12.5k on that term deposit – a pay cut of $100 a week. And that will be repeated across hundreds of thousands of Australians with savings. It is a terrible idea – but it will be done regardless

• It will push more investors toward gold. Lower rates, and the lack of return one can earn on cash will almost certainly push more investors toward gold. We’ve discussed this at length at ABC Bullion this year – discussing the incredible increase in demand we’ve seen from SMSF trustees in 2015, as lower cash rates and more volatility on the ASX fuels greater gold demand

More rate cuts will lead to more of the same

Interview with Dukascopy TV

Earlier in the week – we caught up with Natalie McDonald from Dukascopy TV, to discuss the latest developments in the gold market.

The interview runs for about six minutes and discusses the decision by the Fed, what is happening with the AUD, and the pick up in phsyical gold demand that we’ve seen of late.

If you would like a look – you can find it on this link 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.