Calendar year 2016 has had a volatile start for investors in financial markets, with equities the world over under significant stress. Fears regarding a slow-down and potential hard landing in China, as well as broader concerns about tepid global growth, as well as rising geopolitical tensions in the Middle East and Korea have seen hundreds of billions in ‘wealth’ wiped out.

No region has escaped the rout, with the pain felt in Shanghai, London, New York and Sydney too, with the ASX falling below 4,900 points earlier this week, in what has proved to be the worst start for equity markets on record.

Fortunately, those of us with investments in precious metals have been sheltered from this storm, with the price of gold rising back above USD $1100 an ounce at point, though some profit taking and some commodity index rebalancing has since seen the price of the yellow metal ease back toward USD $1,080.

Silver has held its ground, currently sitting just below USD $14.00 an ounce, whilst prices in Australian dollars for both metals have surged, with the weakness in the local currency pushing gold and silver toward AUD $1550 and AUD $20 an ounce respectively.

Demand for physical metal has been robust over the holiday period, especially at the retail level, with US Mint silver coin sales apparently quadrupling. With a gold/silver ratio near 80:1, we were happy to personally take part in that buying activity, and topped up our own SMSF with some silver over the holiday period.

We’ve noted many of our clients have also done so over the past few weeks, with gold and silver sales off to a solid start to the year, evidence of the robust demand that exists for precious metals today.

Where to for 2016

Regular readers of our market updates are well aware of our bullishness regarding the future direction of precious metal prices over the medium and long-term, and the fact we see them substantially outperforming financial assets between now and the end of the decade.

In this first missive of 2016, we thought we’d take a technical look at the broader equity and precious metals market as it stands two weeks into the calendar year, as well as share some articles, charts and comments that have caught our attention in the past week or so.

Technical Update

with John Feeney

The most important chart of the New Year, and what has been spooking many investors in recent months is the chart of the S&P 500 index below. The major upward trend line from the GFC low in 2009 broke last year, which very much contributed to the acute sell off that we saw in August 2015. From a technical perspective alone, the chart signaled much more downside could be on the horizon and is overall quite bearish. With the recent volatility, this is no doubt on of the reasons why why the mainstream media such as CNBC, Wall Street Journal, Bloomberg have now jumped on the 'bearish stocks bandwagon' of late.

What is also important on the chart below is that it has been experiencing ’negative divergence’ on some of the leading indicators. This occurs when the price is in an uptrend, BUT some of the leading indicators are trending downward. This can be an early warning sign that the price of the underlying security may be reversing. For this reason, expect more technical analysts in the media to advise ‘selling rallies’ in the S&P 500. As you can note below, this indeed occurred in the 2007-2008 period also.

But what does all this mean for gold? Well, gold tends to perform quite well in environments where global equities are having trouble. Money can flow out of equities and into gold during times of distress and uncertainty.

What it also means for Australian investors is the fact that the ASX 200 is very much likely to follow the major US stock indexes if they do in fact head into the next bear market. As equity markets are performing like dominoes of late, a 2% drop in the S&P 500 usually means around a 2% drop in the ASX the following day (the ASX will also have a relief rally today off the back of some respite on Wall Street overnight). So the opportunity of investing in AUD gold relative to other asset classes has improved with the outlook above.

If we look at the AUD gold weekly chart we remain in this gradual uptrend, with the last buy sign from the Williams % Oscillator at $1,450 to $1,475, circled below. With the AUD continuing to lose ground and set new medium term lows, my overall outlook for 2016 is a poor performing stock market and an even lower AUD.

We also expect a better performing year for AUD gold than what we have seen the past few years, with the metals likely to move higher.

Precious Metal News

Unsurprisingly, the market turmoil we’ve seen in the first two weeks of the year has seen a noted pick up in gold ETF buying. In the five days to January 14th, investors bought over 25 tonnes of physical gold, the fastest pace of purchasing in over a year.

In an environment where financial assets are crashing, and oil is moving into the $20 a barrel range, it’s good to see investors rediscover their appetite for gold, with the return of ETF buying, should it continue, a definite catalyst for higher prices in 2016 and beyond.

We’ve also seen the World Gold Council update their latest official reserves data, which shows continued buying from central banks the world over, most notably Russia and China, with the latter clearly keen to reduce their reliance on US Treasury holdings as the major component of their FX reserves (see chart below).

Within 24 hours of RBS shocking the world (or at least gaining plenty of attention in the financial media) with their ‘sell everything’ call as it pertains to equities, UBS was also in the news, warning that a 30% correction in stocks was possible, and that clients should instead “buy gold”. Describing gold as a currency and not a commodity (a view we agree with), UBS see the yellow metal attracting safe haven money in 2016, with a potential top in the US dollar and subsequent bear market in the greenback also likely to add upside pressure to the precious metals complex in the next few years.

UBS even went on to note that they still see gold as being in a secular bull market, with a potential price MINIMUM of USD $3,300oz. With the AUD likely to head into the USD $0.50 to $0.60 range in the coming years, that’s well over AUD $5,000 an ounce in local terms.

There is little chance investors will see that kind of return in property or blue chip stocks in the years ahead.

Read of the Week

By far the longest (and most interesting) precious metal read we’ve enjoyed since returning to the office was written by John Hathaway, of Tocqueville Asset Management. John Hathaway is an extremely well known and well respected analyst and fund manager in this space, and its worth reading his reports, the latest of which can be found here.

We would highly recommend readers view this article, and pay particular attention to the comments regarding the decline in open interest on the COMEX, the reasons behind it, and why synthetic gold exposures may well not provide the kind of portfolio protection investors are looking for. This is one of the main reasons why the great majority of my own precious metals exposure is in physical form.

Arguably the most interesting chart from his entire read was the one which highlighted the combined net speculative longs for Euros, Japanese Yen and British Pounds, which you can see below

The level of bearishness towards these three currencies (and the level of long US dollar bets) is literally unprecedented, no doubt driven by the belief the Fed will follow through with its interest rate hiking plans. We’ve no doubt this level of US dollar bullishness will fade, which gives us even more confidence in our long precious metal positions.

The chart on Chinese purchases of US Treasuries (see below) is also instructive, with the Middle Kingdom clearly displaying a waning appetite for paper emanating from Washington, not that we agree with those who argue China will deliberately try and crash the US dollar.

Finally, we agree fully with the final observations Mr Hathaway made, which was that;

“Much of what passes for financial wealth is in our opinion imprisoned in a matrix from which there is no easy exit. The return migration of capital to real assets promises to be disruptive. The misdirection of capital could well cause losses for many but opportunity for a few. The list of opportunities is short, limited in capacity, possibly complex, and difficult to access. Among the possible opportunities, gold is accessible and straightforward. Gold has a history of responding inversely to the direction of confidence. Gold ETFs, such as GLD, offer the best attributes of self-reflexivity from a bullish perspective. Outflows from the $3 trillion of equity ETFs seem likely to exacerbate downside market risk. The opposite is true for gold ETFs, which must respond to capital inflows by purchasing physical metal. The pool of liquid gold to meet that need has been severely depleted. We believe that the stage has been set for a significant repricing of gold in all currencies, including the US dollar. Ownership of physical gold outside of the financial system seems to make more sense than ever. Gold-mining equities, which have been severely depressed by the four-year decline in the gold price, should also participate. We believe that a trend reversal could prove explosive for the entire precious metals complex. That captures the situation for investors in precious metals very neatly.

From all of us here at ABC Bullion, we wish you the very best in 2016

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.