It’s been another quiet week in the precious metals market, with the price of gold trading in a relatively narrow range between USD $1,080oz and USD $1,095oz, with participants focused on the upcoming non-farm payrolls report from the United States, which will be released tonight Sydney time.

Silver has also been in a roughly US $0.40 cent trading range, between USD $14.40 and USD $14.80, up a couple of per cent for the week based on last Fridays London Fix price.

And whilst the market has been focusing on the upcoming employment numbers due out tonight, there has been no shortage of economic data out for the week already.

In the United Kingdom, we’ve seen the Bank of England “dove up”, with the BoE stating that “The near-term outlook for inflation is muted and the falls in energy prices over the past few months will continue to bear down on inflation at least until the middle of next year.” They went on to say that; “Given the likely persistence of the headwinds facing the economy the MPC expects Bank Rate increases, when they come, to be gradual, and to be limited to a level below past averages.”

The continued dovishness by the BoE, plus existing QE programmes in place in both Japan and Europe are already putting upward pressure on the US Dollar, and will make it increasingly difficult for the Fed to raise rates meaningfully, although the market is increasingly looking toward a September lift off.

We aren’t convinced that will end up happening, as economic data out of the United States continues to underwhelm. Apart from a solid ISM non-manufacturing PMI result, the majority of data out this week from the United States this week was poor.

The ISM manufacturing PMI report came it at just 52.7, a contraction from last month and signifying exceptionally modest expansion, whilst construction spending month on month rose just 0.1%, well short of expectations.

The ADP private sector employment report also grew by just 185,000 jobs, well short of expectations, whilst we also saw a blow out in the US trade balance, which came in at -$43.8 billion in June 2015, up from -$40.9 billion in May.

No point better illustrates the still tepid nature of global growth, and the danger that the much stronger dollar already posses than a sub point from the news release highlighting the latest trade deficit figures which highlighted that;

• Average exports of goods and services decreased $6.8 billion from June 2014.

• Average imports of goods and services decreased $7.9 billion from June 2014.

The entire release can be seen here

As for the precious metal complex, we continue to believe gradual accumulation will serve investors best. There is still the potential for lower prices short term in USD, though we do expect the currency to largely offset any weakness.

It also remains to be seen whether or not the non farm payrolls report due to be released tonight moves the precious metal market in any meaningful way. In the lead in to many a US employment release we often see the market trade in a tighter range, and it doesn’t always move appreciably once the data has is released, as it’s all about what the result comes in at vs. expectations.

One person who thinks we will see some fireworks this time around, with a potential USD $100oz move coming, is Peter Grandlich, who just yesterday commented that; “Given a rather bearish technical pattern at the moment (bearish flag pole), tomorrow’s employment release can be the ignition to the next $100 or so move in gold’s price.”

Grandlich went on to say that a test of the critical USD $1000oz area is possible, though; “if the employment number is significantly weaker than expected, I suspect we could a dramatic short-covering rally that could signal the climatic end of this nearly 4-year old bear market.”

We will know within 24 hours which way the market moves. As it stands right now, analysts are expecting the non-farm payroll report to come in somewhere around 220k jobs.

I think it will either need to be above 250k, or below 175k for it to have a profound impact on the market, though we’ll of course also be looking at what happens to the headline unemployment rate, the participation rate and average hourly earnings as well.

Indian Imports

Whilst market attention late last month was focused on the announcement out of China re updated PBOC gold holdings, we shouldn’t forget what is happening in India, traditionally the biggest ‘consumer’ market for gold. July imports were somewhere between 70-75 tonnes, whilst August numbers are expected to be even higher. The head of gold refining at MMTC-PAMP, Rajesh Khosla, was quoted in Reuters this week, where he stated that he expects total imports to number between 900-1000 tonnes for 2015-16 financial years.

This is a testament to the continued pro-cyclical demand that we will see out of India, and one that we expect to rise in the coming decades as a result of higher economic growth in the country, higher wages, and incredibly favourable demographics.

The chart below, which came courtesy of Gold Core, shows the cumulative demand out of China and India over the past few years. Accumulation on a monthly basis, which you can see in the bottom area, remains very strong, with demand consistently in the region of 250 tonnes a month or more. Combined, the two nations are expected to purchase close to 2,000 tonnes this year, more than two thirds of total expected primary physical gold production.

GLD continues to shed holdings

Whilst pro-cyclical buying out of Asia and India remains strong, the Western appetite for precious metals continues to decline. Earlier in the week, Kitco carried a piece highlighting that the gold reserves held by GLD, the world’s largest gold ETF, had fallen to near seven year lows.

At just 667 tonnes (as at 5th August), GLD is holding barely half the total tonnage it was at its peak holdings back in 2011-2012, testament to the almost complete abandonment of gold by Western investors in the last four years.

AIA National Conference

Earlier in the week I was lucky enough to be invited to give a talk on gold at the AIA national conference, which was held on the Gold Coast. The conference was excellently run, with a few hundred investors coming along to hear from a range of market commentators and fund managers.

My talk was titled “Who would want to buy Gold”, a title I thought apt considering the sentiment towards the precious metals market right now.

I discussed a number of topics, going through the typical criticisms investors have towards precious metal investing, such as the belief that gold can’t do well in an environment where interest rates are rising, and that you need ultra high inflation to justify a gold position.

These are topics I’ve covered in market updates before, so I won’t repeat them here in detail, but there were two things that happened that are worth sharing, as they dovetail in with how bad sentiment is towards precious metals today.

The first occurred in a private chat I had with a lovely gentleman the night before the conference proper started. He was a retiree who’d built up a big portfolio of shares and other assets. He asked me what I was doing at the conference. When I said that I was there to talk about investing in gold he immediately replied “Gold is Dead”. We had a pleasant chat and he certainly wasn’t a gold hater, but his reaction spoke volumes of what one will ‘learn’ scanning financial market headlines, nearly all of which are screaming for ever lower gold prices.

The second observation of note was the talk that I presented on the Monday. Most of the other talks that I attended had 80-100 plus people in them, with the majority of these talks focused on Australian or international shares, with a little bit on fixed income and bond investments.

My talk was attended by at best 25 people, a not surprising number all things considered, but another illustration of where investor sentiment toward the market is today.

We are quite confident that those 25 people, presuming they take action and move to incorporate precious metals in their portfolio soon, will earn much higher returns than those who are only now looking to ‘go international’, and buy overseas stocks. For another reminder of this, one need only look at the graph below, which shows a ‘value’ snapshot of the S&P500 today, compared to the long term average.

As you can see, even if we look at the market based on it’s current PE ratio, it’s richly valued, currently sitting at 21x earnings, 36% above it’s long term average. If we look at the CAPE ratio (which is the best in my opinion), then the market is incredibly expensive, at 27 times earnings, some 60% above it’s long term average, whilst the dividend yield for the market is just 2%, more than 50% less than the long term average.

Zero interest rates, record low bond yields and trillions in QE are the primary thing propping up the market as a whole. None are sustainable, and the unwind of this is going to be very challenging for stocks, and likely very bullish for precious metal prices.

And whilst the uncertainty in the precious metal market, and outright pain in the broader commodity sector is troubling for some investors, it really should be seen as an opportunity. The following chart highlights how dislocated these markets have become.

Commodity prices back to where they were in the year 2000, with predictions of ever lower prices. Stocks nearly tripling, and the better part of 7 years into a bull market, with most confident prices will continue to rise.

We know which side of the trade we will be taking.

Investing Quotes of the Week

Before finishing up this week’s market update, we wanted to share some quotes from some of the very best in the investment game, including George Soros. We found them in a Casey Research update, and they are highly relevant to investors in the precious metals market today.

The first thing to remember is that markets are not efficient. They are places where people agree on price, but disagree on value. And the reason they disagree on value is because people have different views on what will happen in the future.

As Soros has stated; “the generally accepted view is that markets are always right, that is, market prices tend to discount future developments accurately even when it is unclear what those developments are. I start with the opposite view. I believe the market prices are always wrong in the sense that they present a biased view of the future.”

The key then is obviously working out which biases are likely to change over time, and position your capital to benefit from the impact the change in those biases has on asset prices.

And this is highly relevant for gold today, for as Soros also stated, “the worse a situation becomes, the less it takes to turn it around, and the bigger the upside”. Arjun Divecha, from GMO expresses the same sentiment in a slightly different way when he states that; “you make the most money when things go from truly awful to merely bad”.

Consider the following

• ETF gold holdings are at their lowest level in years, back below where they were when the GFC hit

• Hedge funds are now net-short gold for the first time in history

• Gold stocks have sold off circa 80% correction in the past four years, with the sector at its lowest level relative to the gold price in some 70 years

• The Gold Silver/Ratio is now sitting at 74, more than double where it was in 2011

• Headline after headline predicts lower prices and “the Death of Gold”

Sentiment, and the current positioning in the precious metals market is truly awful. It is a wonderful opportunity.

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.