Precious metals continued their impressive rally this week, with gold and silver climbing above USD $1150 an ounce and within touching distance of USD $15 an ounce respectively, as weak data, continued market volatility and a shock move by the Bank of Japan to implement negative interest rates boosted demand for safe haven assets.

The move by the Bank of Japan (BoJ) follows increasingly dovish tones coming from the European Central Bank (ECB), with the market expecting more easing from Mario Draghi soon, whilst weak data out of the United States has called into question whether the Federal Reserve will be able to make any interest rate hikes at all in 2016, let alone the four they supposedly have planned.

With the USD gold price and USD silver price both up around 10% from their late 2015 lows, it is clear that the recent dovishness from central banks hasn’t been enough to alter the ‘risk off’ mood that is back in the air, driven by commodity market weakness, fears of a hard landing and the continued volatility in shares.

That is also a sign central banks are starting to lose the air of omnipotence they’ve developed in the past few years. That is only normal, as it's starting to become clear even to the mainstream financial media and Wall Street cheerleaders that the unconventional monetary policies of central banks post-GFC have failed to create sustainable growth.

Be that as it may, central bankers aren’t ready to throw in the towel and consider a change of direction, and indeed we are hearing nothing from them to suggest they’ve got the message, with the conclusion from the ECB, BoJ and Fed that what we now need even more unconventional monetary policy. Witness the latest decision by the BoJ and the increasing dovishness of the other major players in this space, with it being only a matter of time before the RBA ‘doves’ up and cuts rates again.

Indeed, we see the RBA cutting to at least 1.5% if not 1.25% this year, something even Macquarie Bank wrote about this week, talking about their ‘risk-case’, where they see the RBA potentially dropping rates to just 1%.

It has been interesting to see how quickly the fear and questions marks re central bank policy have spread across the market. Despite the fact 2015 was a poor one for both the global economy and most financial markets, the narrative of a recovering global economy was the dominant one.

Nearly all analysts and economists working for the largest banks in the world had quite a lot of faith in the Fed’s ability to normalise rates, and that this could be done without further damage to financial stability, emerging markets and the like.

A few months later, how things have changed! The MSCI global stock market index has hit bear market territory and the chart of the S&P 500 now looks terribly damaged. Further rate hikes by the Fed are now a much smaller probability. This is another reason we wouldn’t be surprised to see a drop in the USD and a continued rally in gold and silver for the majority of 2016, though some consolidation after this great start to the year can’t be ruled out.

With that, let’s turn to the technicals.

Technical Update

with John Feeney

We’ll take a look at a few charts this week, USD Gold & Silver, and we’ll assess both the positives and negatives. Although it’s been a great start to the year, USD gold has some big tests ahead, and is at a very significant point from a technical perspective.

On the US gold daily chart below we can see the 200 day moving average (red horizontal line) trending south, is sitting around $1,131. During the downtrend of the past few years this 200 day moving average has consistently been a point of significant resistance. Gold has rallied up to the 200 DMA quite a few times, but has sold off shortly thereafter.

It is a very positive development to see gold shoot straight through it and is currently trading $20 per ounce above it, however we really need to form a base above this moving average for those out of the market to take a new interest.

On the technical indicators, the MACD is signalling the rally could continue, but the RSI and Williams Oscillator are signalling short-term overbought at this point. If we do in fact see a pullback we want to see gold form a solid base above this 200 day moving average.

A similar case can be made for USD silver at this point, except with the gold/silver ratio sitting pretty close to 20 year highs, silver may be the better long term buy.

Silver too has a big test ahead with its 200 DMA, which also has acted as a point of resistance the past few years. Just like gold, we have short-term indicators signalling it could be due a pull back, but the MACD looks positive step, and is suggestive of further upside.

Another possible technical pattern is what seems to be a rounding bottom pattern on the daily chart drawn below. With the US silver price around the same levels as 2008, one has to wonder if it really could go much lower.

For Australian investors the charts are much the same, but the falling USD has put the AUD at $0.72, stalling the rally for local investors. As it seems more easy monetary policy is on the way globally, it would be expected that the RBA will follow suit. The probability of an Australian rate cut within the next six months has jumped to 96 percent seen. AUD $1600 gold with the local currency well above USD $0.70 is something any Aussie dollar gold bull should be thrilled to see, with this latest bounce in the local currency likely to stall soon, suggesting more upside for domestic investors.

Wall Street: All FANG no TEETH

The stand out chart of the week has nothing to do with gold, and is all to do with the equity market, and it came via a bond fund manager (PIMCO). I came across it yesterday, and it highlights the incredible performance of Facebook, Apple, Netflix and Google (FANG collectively), relative to the rest of the S&P 500.

As you can see below, FANG rose by 64% last year, an excellent result that any investor would be happy with. Broader investors in equity market did not fare so well, with the overall S&P500 generating a paltry 1.4% for the year, a number that would have been negative had the performance of FANG been excluded.

The PIMCO research also noted that the majority of the returns the equity market offered last year had been generated by the most expensive 20 US large stocks, with cheaper stocks staying cheap. In PIMCO’s words; “This type of skewed, narrow market should raise concern among investors. Long-term investors will want to focus on fundamentals and the potential benefits of a value strategy that may come into favor as market conditions shift.”

Food for thought for the perma-equity bulls, and something that makes us feel safer with our physical bullion allocations.

Incrementum Research

As regular readers of ABC Bullion market updates will know, we are big fans of the research released by Ronald Stoeferle and Mark Valek over at Incrementum, the most high profile of which is their annual IN GOLD WE TRUST report, which typically gets in excess of 1 million views.

We were delighted to play a small part in putting the latest of those reports together, and having our own book referenced in that research piece. The team over there have been very busy, not only launching managed funds, but publishing a book, titled Austrian School for Investors: Austrian Investing between Inflation and Deflation.

I’ve been fortunate enough to have a read, and think it’s a fantastic book – giving investors a great framework that helps them tie together what is happening and likely to happen in the real economy, developments in financial markets, and the tectonic movements in the monetary system itself.

Anyone interested in being a good investor, and protecting and growing wealth in the coming years needs to have a solid grasp of all those factors, and a book like that will help bring it all together.

They’ve also just released their latest advisory board discussion paper, which you can access here.

Titled; “Is the narrative of a healing economy finally collapsing?” the discussion includes input not only from Mark and Ronald but Jim Rickards, Heinz Blasnik and, Zac Bharuch.

There are no shortages of great insights in the paper, which I’d recommend ABC Bullion clients read in full, especially Jim Rickards’ comments on the Fed and their models. That’s highly relevant, as despite the overwhelming weakness we see in the broader economy, it’s the Fed who pulls the interest rate level in the United States.

Therefore, even if we don’t agree with their way of looking at the economy (and we don’t), it’s always important to try and see it through their eyes.

The discussion about the switch from deflationary to inflationary forces is also worth reading, especially the comments about what the next phases of QE will look like, all across the developed world.

Until next week,

Warm Regards

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.