Precious metal prices have had an uneventful week, easing USD $10 per ounce, whilst in Australian dollars, we’ve seen the market consolidate just above AUD $1600 per ounce. Silver has also had a relatively uneventful trading week, currently sitting just below USD $16, and above AUD $22 per ounce.

The consolidation in precious metal prices was hardly unexpected, after a solid 2 month rally that had seen gold rally by USD $100oz, and even more impressive moves in silver.

Despite the increasing likelihood that the worst is behind us for USD Gold, the market as a whole is still a long way away from being ‘optimistic’ about future prices. Evidence of this was seen at this weeks LBMA conference held in Vienna, where the average gold price prediction for next year was just USD $1159.80 an ounce, more or less unchanged from where we are today.

Indeed pockets of extreme pessimism remain, with some forecasters still discussing USD $800oz gold prices.

This is of course a good sign from a contrarian perspective, as too much optimism typically leads to falling, not rising prices. We are quite certain that when gold is one day a bubble, we won’t be seeing timid or even negative price outlooks for the yellow metal.

For local investors, the outlook for the AUD is the most relevant factor to consider short term, which we’ll look at in this short technical piece below.

Technical Update

with John Feeney

Despite the consolidation this week, USD gold has had a good start to the month, with a potential trend developing. We wouldn’t be concerned with any pullback toward USD $1,145 - $1,150oz, which may be on the cards, but could form the base for the next leg higher.

Part of any short-term gold weakness is tied to the further talk of the ECB easing, which will see investors flocking to the USD last night. This will potentially exacerbate AUD weakness, with the AUD, which has had a decent rally of late trading at 0.724 at the time of writing.

But we think that rally is coming to an end. The technical set up for the AUD has a few bearish indicators. When the AUD was up around .733 recently the Williams and RSI indicators were signalling overbought.

We also have the MACD signalling a sell sign, as momentum appears to be rolling over, from overbought levels. This is all captured in the chart below.

Bottom line: The outlook for the AUD is still quite poor, and a move back to and possibly below USD $0.70 could well happen between now and Xmas.

Draghi Speaks

Not that it was necessarily a huge surprise, but one of the major market moving events of the week was the European Central Bank interest rate decision, the release of their monetary policy statement, and the press conference conducted afterward.

Leading into this event, market expectations were running high that the ECB would announce additional stimulus, or at least strongly hint at more to come, and they did not disappoint.

Whilst they left their three major rates (main refinancing operations, marginal lending facility, deposit facility) unchanged at 0.05%, 0.30% and -0.20%, they left the market in no doubt more policy stimulus is on the way, and its just a question of WHEN, not IF.

Draghi commented that; “the degree of monetary policy accommodation will need to be re-examined at our December policy meeting” and that “it was not a wait and see, but a work and assess” situation. The ECB, according to Draghi, remain “ready to act if needed” and, they remain “open to a whole menu of monetary policy instruments.”

As for the market reaction – well its fair to say that stocks loved the news, with the Euro Stoxx 50 index climbing over 2.50%, something that carried over into North America, and into Australia today, with the ASX pushing 5,350 points, up 1.7% for the day so far.

Yields on bonds fell too, with German 2 year yields touching -0.30%.

Short-term, the Draghi speech is a double edged sword for the gold market. On the one hand, its more evidence that we’re going to be in this world of extraordinary monetary stimulus for longer than anticipated, which would typically be gold bullish. The flip side of course is that the Draghi speech boosts the prospects of a USD rally, which typically hinders gold price moves, at least in the short term

Macquarie Bank sees the Aussie Cash Rates as Low as 1%

Lower, and even more extreme monetary policy is sadly not going to be restricted to the northern hemisphere, with more easing almost certainly on the cards in Australia too.

Local interest rates, and Australian banks, have been in the news again these past couple of weeks, for all the wrong reasons. First up was Westpac, who shocked the market with their announcement that they’d be hiking interest rates on mortgages, by 0.20%.

The move was supposed to strengthen the bank, and has been carried out (officially) to help satisfy APRA requirements re bank capital.

As is typically the case, once on the big four banks move, its only a matter of time before the others follow, and sure enough, we’ve already seen CBA and the NAB hike rates too, by 0.15% and 0.17% respectively.

This tightening by the majors has led a number of analysts and forecasters to state that it will force the RBA’s hand, making them cut interest rates below 2%, in an effort to ‘offset’ the out of cycle rate hikes Australian mortgage holders have just been slugged with. Odds have strengthened that the RBA could move as soon as November, on Melbourne Cup day, though that may be too soon, with the RBA unlikely to want to be seen to be reactive or panicked.

In terms of where rates are going, we’ve long been stating that we see the RBA cutting rates at least as low as 1.5% in this cycle. That prediction might end up being seen as ‘hawkish’, as Macquarie Bank have just come out with a research note suggesting the RBA could cut all the way to 1%.

Now it must be said at this point that this is not their base case, though they have stated that their “assessment of the likely changes to the RBA’s growth and inflation outlook points to an economic case to cut rates.”

That was their thinking before the hikes by the majors (sans ANZ), which has only further reinforced their thinking that a rate cut could be seen in two weeks time.

The chart below highlights their view on where rates could be headed.

And whilst we might not see a 1% cash rate anytime soon, we definitely don’t think their base case (which forecasts rate hikes on the horizon), has any chance of coming to fruition.

Lower commodity prices, negative real wage growth, a peak in housing construction, declining business investment and the shuttering of the local car industry will see to it that we don’t see any rate hikes for some time to come, with the only question being how far the RBA does indeed cut.

Back to Australia, and should we see a benign official inflation print in Australia next week, then perhaps a rate cut will come on Melbourne Cup day, though we will have to wait and see.

If the risk case espoused by Macquarie does come to fruition, we can’t help but feel we will see a further rush toward physical precious metals, especially from SMSF Trustees and retirees, the vast majority of whom are growing increasingly frustrated with the savage cuts to their income.

This is something we wrote about in detail over a year ago, when we published an article titled “Negative Rates are killing Australia’s $700bn term deposit market”.

In light of the latest news on the interest rate front in Australia, it’s worth re-sharing, and can be found at this link here

Until next week

Warm Regards

Jordan Eliseo

Disclaimer

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