The precious metal market has enjoyed another steady few days, consolidating gains above the USD $1300oz level for gold, whilst silver is just above the USD $21oz level for now, last trading at USD $21.10oz

It has been relatively uneventful week, with no major developments on the geopolitical front, nor any ‘market moving’ economic news, though there’s been some volatility in equity markets these past few days.

Indeed all eyes seemed to be waiting on the overnight release of the latest Federal Reserve Minutes, though even this has no major surprises, with QE likely to be tapered according to previous guidance.

Gold and silver actually reacted positively to the release, with gold at one point trading up around the USD $1332oz mark, before retreating to the USD $1328oz mark currently, whilst silver also saw a short lived spike up too.

Whilst there were no major surprises in the Fed minutes, it was worth nothing that Fed officials see themselves first raising rates by around the middle of 2015, whilst perhaps more importantly, as per Capital Economics take on the subject;

“It now looks as if the Fed will continue to invest the proceeds of its maturing asset holdings until some time after the first rate hike. Outright asset sales were not even discussed in the minutes, which adds to the impression that if sales even took place, it could be 2016 or 2017 before they begin.”

Whilst the end of QE and even a potential rate hike could be seen to be ‘gold bearish’ as these are steps toward a more normalised monetary policy environment, we aren’t so fearful of these developments, should they ever take place.

Firstly, a large part of the huge sell of in gold in 2013 was due to the market ‘pricing in’ of the end of QE, and the return to more normalised rates, so participants in the gold market had already taken these potential developments into account.

Furthermore, if rates are rising, but so is the level of CPI, then the ‘real rate’ environment could actually become even more supportive for gold, as investors will still seek it out as an inflation hedge, as they did for the latter part of the 1970’s, when gold was flying, alongside interest rates.

In the shorter term though, Chris Weston, Chief Market Strategist at IG Markets summed up the current state of the precious metal market pretty succinctly where he stated

“The overnight FOMC minutes could probably be taken on the dovish side by markets, as many had expected a much more robust influence from the hawkish contingent of the Fed. Recall the minutes allow the non-voters (many of whom are fairly hawkish) the chance to express a view, where the statement released on the day of the FOMC meeting only expresses the view of voters. Spot gold founds buyers as a result of the minutes and gold bulls will be keen to see a break of the recent range of $1310 to $1330. It seems that after a strong rally through early June gold is consolidating, so an upside break of this range could see $1360 in play. The 200-day moving average at $1310 seems solid support.”

The US Economy through the eyes of the retailers

Sometimes it’s easy to get lost in macro data, when trying to analyse the underlying health (or otherwise) of any economy. Retail sales, unemployment, CPI, consumer confidence, GDP growth, they’re all ‘headline’ data that we use to try and read the tea leaves as it were.

Sometimes though, its worth paying attention to people that own and run businesses, you know the types that employ people, sell goods and services, pay taxes and the like.

And on that note, there have been some interesting headlines and news reports over the past few days, which cast grave doubt over the supposed bounce bank in economic activity people are expecting in the USA.

Firstly, Lumber Liquidators, a retailer of speciality hard wood flooring, shocked the markets when management reported that they are only expecting to earn between USD $0.59 and USD $0.61 per share in Q2 2014, a huge reduction from where market ‘analysts’ thought the company would be, with consensus indicating earnings would be closer to USD $0.90 per share.

CEO Robert Lynch stated; “Customer traffic to our stores was significantly weaker than we expected, particularly in geographic areas severely impacted by the unusually harsh weather in the first quarter. The improvement in customer demand we experienced beginning in mid-March did not carry into May, and June weakened further. Our reduced customer traffic has coincided with certain weak macroeconomic trends related to residential remodelling, including existing home sales, which have generally been lower in 2014 than the corresponding periods in 2013.”

It wasn’t just Lumber Liquidators either, with Container Store CEO Kip Tindell stating that; “We are confident that customer enthusiasm for our brand, and employee morale are at all-time highs, yet we continue to experience slight traffic declines in this surprisingly tepid retail environment.”

Even Wal-Mart are experiencing troubles, with their CEO Bill Simon appearing on CNBC recently to state that “retail in general has not been robust in the last six years, in the last year particularly”

You can read about those stories in more detail here and here

If Gold “catches up “with the Fed Balance Sheet

The chart below came into my inbox this morning, and thought it was worth sharing as part of our weekly update. It’s a very simple chart plotting the Federal Reserve Balance Sheet, the S&P500 and the Gold Price (in USD).

As you can see, there has been a remarkable correlation between the expansion in the Federal Reserve Balance Sheet and the S&P500, but for gold, this relationship has, for now, broken down.

If it were to recover (and we aren’t saying that it definitely will), it portends significant upside for gold in the months and years ahead.

Latest Superannuation Scandal

It really is no wonder that the Self Managed Superannuation Fund industry goes from strength to strength in this country. Not only are our biggest banks, which tend to control the for-profit retail funds, in the bad books regarding their sometimes less than honest and transparent advice, but their industry fund counterparts also look like they have some explaining to do. Earlier this week, a royal commission was presented with evidence that one of Australia’s largest industry funds has handed over member information to the Construction, Forestry, Mining and Energy Union (CFMEU).

A report into this can be read via the Australian Financial Review here.

On top of this, there was an interesting article in the Australian on July 5 that detailed some rather peculiar sponsorships other industry fund giants make.

The sole purpose test is very clear that superannuation funds must be;

“established and maintained for the sole purpose of providing benefits to members upon their retirement, or to a member’s beneficiaries in the event of their death. Trustees must ensure that any decision made in relation to the fund, including the acquisition, use and sale of fund assets, relates solely to the provision of retirement benefits.”

You can read the Australian report here.

We’ll leave it with readers to decide whether the above fits in with the sole purpose test, but it certainly makes me happy that I have my own SMSF.

Term Deposits keep sinking

In a surprise to no one who follows the gold space, we’re actually seeing falling rates across the world right now, not rising ones, which was the consensus opinion as 2014 got underway.

And whilst the RBA in Australia hasn’t cut rates below 2.50% yet (I’m still predicting they will before the end of this year), banks in Australia are reducing the rates they are paying on term deposits to their customers, with latest data from the AFR indicating that rates are now around the 3.50% mark

This is barely ahead of official inflation and nowhere near keeping up with the increase in prices for utilities, health care, insurances and the like, which is a major reason consumer confidence is so low, and hasn’t recovered in any meaningful way since the Budget was released.

It’s also particularly cruel on those looking to save and build wealth, as well as retirees and SMSF investors, who tend to be quite cautious and hold large percentages of their portfolio in cash and term deposits.

If I were them, I’d re-allocate a portion of their low yielding term deposits into physical gold and silver.

Final World

Couldn’t finish this latest market update without linking through to a blog from Macrobusiness, which appeared this morning. Referencing the SMH, it included the following great quote from Funds manager Mike Mangan, who had to this to say on global monetary policy settings;

“Meteorologists (and insurers) speak of the 1 in a 100 year flood. But what is happening in western economies (and Japan) is not even close to a 1 in a 100 year event. It has not happened in centuries and I would argue human civilisation hasn’t experienced the sort of monetary conditions we now bear witness to, since the Bronze Age. How and when it all ends, no honest person knows. But I strongly suspect that when it ends, it will end badly."

As the team at Macrobusiness acknowledge, gold tends to do pretty well in environments where other things are going badly.

Full link here

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.