The tragic events in the Ukraine, and the ongoing and in many ways escalating conflicts in Israel, Gaza and Iraq were a sad reminder to everyone, investors included, that we live in an often dangerous and unsafe world.

Whilst one hopes we see a swift and peaceful resolution in all of these ‘hot-spots’, it does seem unlikely, with reports overnight that two Ukranian military jets had been shot down, whilst their was talk of a truce between Israel and Hamas, though nothing has been agreed at this point

With that as a backdrop, it’s not surprising that traditional safe haven assets like gold (and US Treasuries) have received a bit more support over the last few days, with gold climbing back above USD $1300oz, and US Treasury 10 year yields falling all the way to 2.47%

Despite the safe-haven bid, traditional risk assets are also performing well, with investors still full of belief that the Federal Reserve and other Central Banks have their back, and that there is no immediate risk in equity markets.

The following chart from Zerohedge actually shows the price action of the last 3 days, with equities rising, as well as bonds, remembering that falling yields = rising prices for bonds.

Source: Zerohedge

On top of the movements in asset markets this week, and the geopolitical tensions we’ve mentioned, there’s been no shortage of developments on the economic front either, with the IMF saying they believe the Federal Reserve could keep interest rates low past mid 2015 if the current economic outlook holds.

Indeed the IMF have actually downgraded US growth forecasts, predicting that we’ll see growth of only 1.7% in the worlds largest economy this year, whilst US retailers also downgraded their forecasts for retail sales growth.

In the Eurozone, the major piece of news was the slippage in consumer confidence, with a reading of -8.4. The proximity of the crises in Ukraine, and the banking crisis in Portugal are no doubt factors playing on the minds the Europeans.

The cloudy outlook isn’t dampening the positive mood though, with this article catching my eye overnight. Titled “Seven Charts that leave you no choice but to feel optimistic about the US economy”, it’s a good guide to how mainstream analysts, forecasters, economists and asset managers are looking at the world these days.

Call us pessimists, but we’re not quite so sanguine.

How about Australia

The biggest news of the week in Australia was undoubtedly yesterdays Consumer Price Inflation (CPI) data, which showed that, officially, prices rose 3.0% in the year to June 2014.

The trimmed mean measure, which many analysts prefer to focus on, was up by only 2.9%, though this was higher than the market was expecting.

The slightly higher than expected print led to a series of articles proclaiming that the ‘inflation threat’ wiped out any chances of a further interest rate cut this year, with some economists re-stating their predictions that the next move in rates is higher.

They are wrong.

Firstly, the RBA won’t be too worried about these levels, as, like every other central bank, they’re actively hoping for higher levels of inflation to decrease the real value of our unprecedented debt bubble.

Secondly, next quarters inflation print (on an annual basis) is likely to be fairly benign, probably closer to the 2.5% level, as a 1.2% Q2 2013 print rolls off the annual number.

Macrobusiness had a great blog on this subject yesterday, including a very useful graph, which showed the quarter-by-quarter inflation reads.

You can read that full Macrobusiness article here (though you’ll need to be a member)

As you can see, there was a rather large uptick in inflation in Q2 last year. Next time we look at a set of annual numbers, for Q3 2014, this number will have fallen out of the equation.

As a result, all other things being equal, the RBA will be fairly unperturbed by yesterdays CPI read, and I still expect to see a rate cut by September or October this year.

On this issue at least, we are in agreement with Goldman Sachs, with Tim Toohey, their head of Macro Research in Australia and New Zealand stating that Goldmans “retain our view that the RBA will look to ease interest rates in 2014, most likely in September.”

Whilst this is obviously terrible news for retirees and savers, the potential for lower rates is great news for mortgagees, with borrowing costs likely to head even lower in the coming months.

On that note, the mortgage battle between the big banks heated up yesterday, with CBA, NAB and Westpac all announcing 5 year fixed rates of 4.99%. You can read about that here

Will we never learn!

The AUD and your precious metal investments

The outlook for interest rates in Australia obviously plays a major part in forecasts for where the AUD will go, which therefore impact your investments in physical gold and silver.

The AUD rallied strongly off the back of yesterdays CPI news, and is currently sitting just below USD 0.945, with some analysts looking for a technical break out and rally towards USD 0.96 or above.

With iron ore prices continuing to struggle, and our own economy struggling under the weight of expensive housing, unprecedented private debt, rising unemployment and a weak consumer, we do think that the AUD will weaken in the coming years, especially if the RBA cuts rates to 2% or lower in the coming months and years (as we suspect they will).

Short-term, this AUD strength is obviously a drag on gold and silver prices for domestic investors.

Long-term, it makes for an even better buying opportunity, as the potential for USD gold and silver price appreciation combined with a falling AUD gives local investors even more bang for their buck.

As such, I’m picking up more metal this week.

Gold Bubble or Bust

Finally, there is an article I highly recommend you read, which I’ve linked in below.

The article quotes two analysts, one a gold bull, and one a gold bear. The Gold bull sees prices heading toward USD $5,000oz, whilst the bear thinks the fair value of gold is closer to USD $800z.

Obviously I am in the bullish camp, but the historical examples the bear uses in his case are worth a read, whilst Adrian Day (the bulls), analysis of risk and volatility (and why they are not the same thing) is spot on.

As I never tire of telling people, in the last 18 months – I haven’t lost one ounce of real wealth.

All that has changed is that in the short term, the price other people would pay me for those ounces of real wealth has declined.

Provided one has the right timeframe, and isn’t leveraged (or only conservatively leveraged), then volatility is nothing to fear, and can in fact be something to profit from.

The full article is here

Until next week

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