If nothing else, this week’s price action in gold proves that the market sure has a sense of humour. Many observers were sure that the failure of the Swiss referendum over the weekend, which would have forced the Swiss National Bank to increase gold holdings to 20% of total reserves, would be the final nail in gold’s coffin, and that precious metal prices would crash lower.

Indeed markets softened up last Friday, trading sub USD $1170oz for gold, and early on Monday it did indeed look like a crash was on our hands. At one point, gold traded into the USD $1140oz range, whilst silver, unbelievably – crashed below USD $14.50oz.

It was around this time that a number of incredibly bearish articles regarding the outlook for gold were issued, with my particular favourite ‘charting’ gold’s imminent demise to USD $600oz

Instead, the precious metal market rebounded violently, on heavy turnover too, with gold shooting back above USD $1200oz, whilst silver, incredibly, went back above USD $16oz, a more than 15% move in one day.

Whilst this has confounded many a pundit, the sharp rally back was in many ways to be expected. After all, sentiment was already terrible leading into the Swiss referendum, and at the end of the day – nothing really changes as a result of it.

The Swiss National Bank wasn’t buying gold last week, and it won’t be buying gold this week

Furthermore, last week we also saw the Indian government scrap their 80:20 rule regarding gold imports. This was one of many rules the Indian government and Reserve Bank implemented over the course of the last 18 months in an attempt to curb gold imports and get their current account under control.

The relaxation of these rules has added some confidence to the market, not that it will necessarily lead to a immediate increase in physical buying

Finally, in further evidence of how tight supply is in the physical gold market, GOFO rates, which is short hand for Gold Forward Offered Rate have been in negative territory for some time now.

For people new to gold, GOFO is a bit of a technical term that takes some explaining.

I’ll write more on the subject another time, though suffice to say it’s a rare occurrence for GOFO rates to be negative, and when it occurs, it’s evidence of tightness in physical markets, and strong demand for the metals.

All up I see the last few trading days as incredibly positive for precious metals, and if gold can close above USD $1200oz for the week, we could see higher prices leading into Xmas and the New Year

Even if we see gold prices stagnate for the next few weeks, and close the year out essentially unchanged for the year, I think it’s been a great year for the precious metal.

That might sound strange considering gold (in USD terms at least) is essentially unchanged for the year, but considering the following, I think we should be very happy

This year – the gold market has had to shrug off

• The cessation of all quantitative easing by the Federal Reserve

• A huge rally in the US Dollar

• Plunging commodity prices

• Further equity market strength

For Australian dollar investors, gold is actually up nearly $100 an ounce, or 6.5% based off an end 2013 price of $1346oz. That’s better than cash, and in line with equities and what superannuation funds are likely to end up delivering

Considering the sell-off in the gold market last year, and the almost universal pessimism that the gold market was facing heading into this year, I think investors in precious metals should be satisfied with what 2014 has delivered so far.

Gold in Developed Market Currencies

An interesting chart I came across earlier this week that I thought was worth sharing was the following one below, which I read on Gold Core’s blog.

It plots the return of gold in the various G4 currencies, vs. the US Dollar, where it is flat, but also versus the Euro, the UK Pound and the Japanese Yen. As you can see, whilst returns have been flat in US Dollars, in Euros and Japanese Yen, returns have been highly encouraging, a result of the depreciation of these currencies in light of Japans extraordinary money printing, and the expectations that the Europeans are about to follow suit

On that note, European Central Bank (ECB) chief Mario Draghi was in the news again overnight, after the ECB had it’s latest monetary policy meetings. The ECB downgraded their forecasts for both growth and inflation in the Eurozone, with Draghi stating that the ECB are

• Preparing a broad based QE package for January (though they may not implement it that soon)

• Unanimous that they’ll support more QE and stimulus if necessary

They also stated that the latest inflation forecasts don’t include latest oil price slide, indicating they could fall further.

Interestingly, he also stated that the ECB had discussed buying all types of assets EXCEPT GOLD

If you’d like to read the article where the above chart came from, you can find it here

A Russian Gold Standard?

I also came across a bit of headline grabbing article this week which made a suggestion that Russia might be looking to go back to some kind of gold standard in the future.

Whilst I don’t think it’s likely that that will happen, there’s no question Russia, China and many countries in the middle east are increasingly looking to do away with the US Dollar, or at least minimise their reliance on it.

Russia has of course been affected by sanctions this year, plus the plunge in oil prices. This has led to a major decline in the value of the ruble, which has fallen by some 40% versus the USD

Whilst this is obviously causing major discomfort and challenges in the Russian economy (particularly the private sector who have over $650 billion in US Dollar denominated debt which is now 40% harder to service), Russian gold investors have been insulated from the fallout.

My good friend Ronald Stoeferle, of Incrementum AG in Vienna, sent me this image last night, showing the price of gold in rubles.

As you can see, its just hit an all time high.

The full article can be read here

Australian Economy

Despite stronger than expected retail sales figures this week, the Australian economy is in a funk. GDP growth rates released this week were much lower than expected, with the economy growing by only 0.3% in the last quarter. Per capita income growth is now negative, which is a major factor in lower consumer confidence figures and the like.

Manufacturing, Services and Construction surveys were also disappointing, especially the construction one just released today, which illustrated a rather dramatic slowdown, falling by 8 points and back into negative territory.

This is more evidence of the lack of economic rebalancing that is occurring in the country, whilst plunging commodity prices are smashing our terms of trade.

The bottom line to all this is that more mainstream economists are now out predicting interest rate cuts next year, a forecast they’ve been reluctant change even as the economy has slowed down these past few months. Most notable of these was Westpacs Bill Evans, whose latest thoughts are included in the attached article.

In light of the growing realisation that the Australian economy is getting worse, not better, it’s an appropriate time to re-share an article I wrote about the local economy in late February of this year.

I was obviously a little hasty in calling for RBA rate cuts this year, but apart from that I think it represents a pretty accurate read of the challenges we face here.

I’m more convinced than ever that we’ll see a 2% cash rate next year (and potentially lower), further punishing savers, and improving the attractiveness of physical precious metals.

You can read that article here, and I’ll look to put together an updated outlook by early next year at the latest.

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. This report was produced in conjunction with ABC Bullion NSW.