Gold Steady as Markets Spooked by Trump's Tariffs

Gold and silver continued their pullback this week, with the price of the metals declining to USD $1315oz (gold), and USD $16.50oz (silver). Overnight, the yellow metal fell as low as USD $1305oz, though it found solid support at this level, and essentially finished unchanged for the day.

A decline in the AUD has supported prices in Australian dollar terms, with the AUD price of gold, currently sitting just below AUD $1700oz, essentially flat for the week. Silver is also steady, currently trading at AUD $21.30oz, with the gold to silver ratio (GSR) still sitting at around 80:1.

Whilst precious metals have had a quiet weak, broader financial markets have not been so benign, with stock markets again falling, with the catalyst a statement from US President Donald Trump that steel and aluminium tariffs are going to be introduced in the United States.

The Dow Jones had a fall of over 400 points from its intraday high off the back of this news, whilst a chart of the S&P500 will be of concern to the bulls, with a lower high in place after a recovery from the sharp pullback that took place in early February seen below. 
 

The weakness in US stocks overnight has also fed through to the local bourse, with the ASX down 0.7% for the day at the time of writing, currently sitting at around 5930 points.

Whilst many may have expected gold and silver to bounce harder this week, a cessation of dollar weakness has held the metals in check, whilst physical bar and coin demand in the West remains at decade lows.

February data from the US Mint showing gold coin sales had fallen 80 per cent year on year, whilst silver coin sales were tracking at their lowest levels since 2008, around the time the GFC hit.

CPM Group, in an update from the middle of January 2018, had some very interesting data that spoke to these very trends, with the charts below showing US Mint gold coin sales to dealers, as well as premiums charged on American Eagle and Buffalo coins.

Speculators have also wound back their bullish bets for three weeks in a row, with positioning now back to the levels we saw in late December last year.

Consolidation in precious metal markets may continue for a while yet, though we’d need to see the price drop through USD $1300oz before to have any concern that this is anything other than a healthy pullback in an otherwise solid uptrend. For Australian dollar investors, currency weakness (more on this below) will add to their potential upside.

The Italian elections could also be a catalyst for greater volatility, though short-term this might add to US dollar strength, which could help put a lid on any precious metal related gains.
Over the medium to longer-term, the outlook for gold and silver will be supported by the building risks in stock and bond markets, with billionaire hedge fund manager Paul Tudor Jones again warning investors to stay well clear of bonds, stating that; “with rates so low, you can’t trust asset prices today.”

Tudor Jones isn’t alone, with Ray Dalio warning that central banks will struggle once the “goldilocks” era of higher growth but still low inflation comes to an end, though he appears to think we have a year or two before these problems come to the fore.

Alan Greenspan has also been singing from the same hymm sheet as Tudor Jones, stating this week that we are “in a bond market bubble” which is “beginning to upwind”.

You can listen to Greenspan's view in full via this CNBC clip here.

Silver Chart!

We’ve commented before that with a GSR of 80:1, silver looks like its set for a period of strong outperformance, not just relative to financial assets, but relative to gold as well.

This week, we came across a great chart from Kimble Charting Solutions, which looked at a major “cup and handle” formation in the silver market, looking at prices over the past 45 plus years.

According to the chartists, whilst silver currently remains within the 7 year falling channel (since its 2011 peak near USD $50oz), this could well be the “handle” in the formation, which, provided the price can move through current resistance, suggests substantial upside in the years ahead.

You can read more about the views from Kimble at this link here.

All things Australia!

It’s been a big week in Australia, headlined by latest capital expenditure (Capex) data, which came in well short of market expectations, declining by 0.2% in the fourth quarter of last year, with forecasts suggesting the result would come in at +1%.

Whilst hardly a disastrous result, it contributes to a more pessimistic outlook for the Australian economy, with the boffins over at Credit Suisse suggesting that the pace of GDP growth in Australia is weakening, with other banks supporting this view.

House price data also continues to underwhelm, with prices on the East Coast easing. Nationwide, prices have no fallen 0.8% over the last three months, with data from Morgan Stanley suggesting there are more falls on the way.

According to their proprietary model (known as MSHAUS) for Australian housing, which includes factors like rental market conditions, credit supply, mortgage serviceability etc, they expect “the property market to continue to slow further over 2018 with MSHAUS falling to the lowest level in its 30-year history”.

You can see from the chart below that the MSHAUS model works relatively well as a forward indicator for real estate prices.

For those who are interested, Business Insider have a great article on the MSHAUS model that you can see in the chart above, which you can access here.

Should the weakness in the housing market persist, then we can all but write off market expectations of an RBA rate hike, which will act to further depress the value of the Australian dollar, which has been under pressure since late January, when it peaked above USD $0.80.

On that score, banks and other market commentators are busy winding back their expectations of the RBA, with NAB now joining ANZ in abandoning their previous view, which was that the RBA would hike rates twice in 2018, with an end year cash rate of 2%.

Now they only see one rate hike coming, though we still think this is overly optimistic, with our view that the RBA will end up on hold for the whole year, and may well end up cutting rates to support economic activity.

The pressure on the RBA will only continue to build should wage growth continue to putter along at record lows, something Westpac unfortunately see as all too real a possibility. A recent report from the bank suggesting only two out of eighteen industries tracked by the ABS are delivering year on year wage growth in excess of 2.5%. Once you factor in taxes on those higher earnings, as well as inflation, most Australians are continuing to go backwards in their weekly finances, hardly a positive for consumer spending.

Compounding the troubles regarding house prices, is the concern re activity in the housing, and especially apartment market, with the latest data from the Housing Industry Association suggesting sales of properties across the nation fell 2.1% during January. The chart below, which comes from the same January 2018 report, paints an even more troubling outlook for multi-unit sales.

The bottom line to all of this of course is that the AUD is likely to remain under pressure for some time to come, reinforcing the sense of owning physical gold and silver in a portfolio today.

Until next time.

Jordan Eliseo

Disclaimer
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