It’s been another tough week for precious metal investors, with gold in both USD and AUD easing further. The catalyst was last Friday’s non-farm payroll report, which smashed expectations, and further increased the likelihood of an interest rate hike by the Federal Reserve in December.

Gold in USD is currently trading at USD $1,084oz, whilst silver is sitting at USD $14.42oz. Silver has shed close to 10% since late October, when it was trading above USD $16oz.

In Australian dollars, it has been a challenging week for metals investors too. After falling toward USD $0.70 late last week, the local currency has picked up, with yesterday’s unbelievable (literally unbelievable) jobs report in Australia ending any hope of a pre-Xmas rate cut in Australia.

AUD Gold is currently sitting at $1521oz, whilst silver is still holding just above $20oz, an area that proved good buying in May, August and September of this year.

Gold: Where to Next?

As it stands, gold is on track to record a loss of some 8% in USD, and remains stuck in a cyclical bear market that traces back to late 2011. In Australian dollars, investors are still up some 5% for the year, which is a steady enough return compared to other alternatives, though some way from the +10% returns we were looking at when the yellow metal pushed through AUD $1600oz at various points earlier in the year.

The question on everyone’s mind though is where prices will head from here, with the latest weakness seeing renewed calls for sub USD $1000oz gold, with the lowest projection we’ve seen indicating gold may fall as low as USD $730oz.

Others, including Peter Schiff, see this recent bout of weakness as largely played out already, with higher prices on the way soon. We would certainly agree that we don’t think a Fed rate hike (if it were to come in December) would really hurt gold that much, only because it’s so widely anticipated and expected by the market, and therefore priced in. For reference, the odds of a Fed rate hike in 2015, based on the futures market, have risen from 20% to 70% in the past three weeks alone.

With the sell off we’ve seen for the majority of the past three weeks, we think some stabilisation in prices is likely here, at least for a short period of time. A look at the gold market from a technical perspective will give us a little more colour on this.

Technical Picture

with John Feeney

Last week we had a look at the long term AUD gold price chart, which showed the pullback of around $100 per ounce fitting well within a normal pullback and uptrend intact.

These sorts of moves in the gold price can be quite concerning for new investors, and can really drive the emotions to do the opposite of what you intend to do, which is buy low and sell high.

So in amongst all the negative press on the gold price at the moment we finally have a few short-term buy signs on the charts.

The US dollar gold price can be seen below, and some indicators for gold to stabilise or rebound. These indicators are never 100%, which is why we prefer to dollar cost average into periods such as this.

The relative strength index circled at the top of the chart below is signalling oversold for the first time since August. The MACD momentum indicator is shaping up nicely and the Williams oscillator is confirming oversold levels on both the weekly and daily charts.

Although the long term USD gold chart still looks pretty average, we have the strongest confirmation of multiple indicators at once flashing a short-term buy signs since August. We are looking for gold to stabilise at these levels and a rebound could be on the cards.

Gold Demand Update

In the last 24 hours, we’ve seen the World Gold Council (WGC) release their Gold Demand Trends for the third quarter of 2015. It makes for interesting reading, with the WGC noting that, on the demand side:

• Global demand for gold jewellery grew 6% year-on-year as lower prices during July and early August attracted consumers. Q3 2015 was the strongest third quarter for jewellery demand since 2008.

• With their eyes on the lower gold price, bargain-hunting investors came out in their droves in the third quarter to buy 295.7 tonnes of gold bars and coins. Demand for these products was 33% higher year-on-year. Outflows from ETFs in July were slightly offset by small inflows throughout August and September.

• Gold demand among central banks and other official institutions almost matched the 179.5 tonne record from Q3 2014. This is now 19 quarters of consecutive net purchases as gold continues to be recognised for its diversification benefits.

• Gold used in technological applications diminished further in Q3. Substitution to lower-cost alternatives, and further economies in the volume of gold used in wireless chip production, saw demand in the sector weaken by 4% year-on-year to 84.3 tonnes.

In summary, bar, coin and jewellery demand picked up, with a noticeable increase in China after the yuan devaluations we saw, whilst there was also a noticeable increase in North American bar and coin demand. We weren’t surprised to see central banks stepping into the market again, with this sector market again on track to acquire in the vicinity of 550-600 tonnes for the entire year.

You can access the full report here:

Gold ETF Holdings

fall Whilst the WGC report did note the role ETFs played in Q3, there have been substantial outflows in the last couple of months. If we look at GLD (the largest gold ETF) for example, we can see that it held 687 tonnes of gold at the end of September 2015.

With the rally in gold at the start of Q4, this number increased all the way up to 700 tonnes by the 15th of October. From that day on, there have been relentless outflows, with GLD holdings now sitting at just 663 tonnes. You would have to go back to 2008 to see GLD holdings so low.

The correlation between GLD (and gold ETF holdings as a whole) and the gold price itself are captured neatly in the chart below, which plots total ETF holdings in the blue shaded area, whilst the USD gold price is the red line.

Charts like this give us greater comfort that we’re coming closer to the end of this corrective cycle in precious metals.

It is clear that all the fast money that chased gold has now exited the sector, leaving only the longer-term holders, or ‘stronger’ hands in the game. With bar and coin demand strong, and continued support from central banks (admittedly not the most price sensitive investors), we do see a decent chance of gold bottoming around these levels.

Local investors should also be encouraged by the likely fall in the AUD in the coming years, which will add another tailwind to prices. Gradually accumulating a core position in the metals, a strategy we’ve long advocated, still seems the most appropriate course of action.

Is Anyone Short Dollars ?

Before finishing this week’s market update, we wanted to share a chart on global currencies, which comes courtesy of the Bank for International Settlements. The key story of the last three years has been the strength of the USD, which has risen noticeably against all major currencies, including the Euro, the YEN, and of course, GOLD.

That strength in the USD got another shot in the arm last week of course, with that non-farm payroll report pushing the Greenback higher, and the dollar index up towards 100.

The Wall Street narrative post the payrolls report is that the American economy is now well and truly on a path to a sustainable recovery. We would quietly note that, impressive though the headline was, average monthly job growth in the US in 2015 is now just 206,000 jobs, no better than it was in 2014, and a DECREASE from last year.

Job growth in 2015 is in fact no better than it was back in 1999, when the US population was some 40 million people, or 15% smaller. Back to currencies, the following chart - which I came across courtesy of Alan Kohler’s Saturday publication for the Eureka report - is highly instructive.

As you can see, the chart above plots BIS calculations of real exchange rates based on relative CPIs for the USD, the YEN and the EUR. You can see the incredible rally in the USD, which has been strengthening since 2011, and has almost gone parabolic on the above chart in 2015. It is as expensive today as it was back in the early 2000s, which of course was the exact time the precious metal market was bottoming.

But despite this incredible four year rally in the dollar, it is now that everybody wants to be long, with confidence in the future strength of the greenback running at all time highs. Almost nobody sees downside risk for the USD, or upside in gold prices for that matter.

It reminds us of arguably our favourite investment quote, from Bob Farrell, the ex-Merrill Lynch chief stock market analyst, who once observed that; “When all the experts and forecasts agree — something else is going to happen”

Personally, we’re going to ride out the volatility in the precious metal market, and top up holdings accordingly. Holding an asset with zero credit risk and infinite duration allows one to do that very comfortably.

Until next week

Warm Regards

Jordan Eliseo

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