The battle for USD $1200oz raged on this week, with prices oscillating around the key point again. The trading for spot gold can be seen in the chart below, which shows what has happened over the last 3 days. Earlier in the week, gold looked like it was breaking down again, with prices heading back toward USD $1180oz. From there though we’ve seen more short-covering, with the metal bouncing back above USD $1205oz on the 15th, before giving back a few dollars again.

The action in silver largely mirrored that of gold, with prices easing down toward USD $16oz earlier in the week, before bouncing back toward USD $16.40oz as we speak. For Australian investors, the bounce in the local currency has hurt, with gold puling back below $1550oz, and silver close to $21oz.

The Australian dollar has bounced back toward $0.78 USD, as a much stronger than expected Australian jobs report has pushed back market expectations of another RBA rate cut.

Whilst the chances of a May cut have definitely lengthened, we still see little doubt the bank will be forced to cut at least two or three more times. Business confidence numbers may have firmed a little too, but consumer confidence is still stuck in the doldrums.

All eyes will now be on the next Federal Budget, due to be handed down in May. That will be interesting to see, as the government has made it clear it won’t do anything to alarm the punters. At the same time, with the iron ore market in dire straits, there will be huge write downs to projected revenue, making any projected returns to a budget surplus a mere fantasy.

This is something that even the IMF have noted in their latest Fiscal Monitor, with Australian government gross debt to GDP likely to double this decade. You can click here for the full report if you want a read.

Not surprisingly, with the gold market still battling around USD $1200oz, there are host of bullish and bearish factors at play. Markets will have definitely noticed the latest Indian gold import data, which was well over 100 tons, more than double expectations.

Another round of predominantly weak US data (more on this below), plus Mario Draghi’s statement that Euro QE will last to at least September 2016 also has market participants more fully recognising that the era of easy money is a long way from over, something that should help give gold a bid.

Question marks over what is next for Greece, with even the Financial Times speculating they are due to default on a 2.4B EUR payment to the IMF will also provide some support.

We’ve even seen Bank of America Merrill Lynch come out with a relatively bullish forecast for gold, predicting that the worst was over and that they saw prices hitting $1,500 an ounce by 2017.

That is a near 25% return in 2 and a bit years if it does come off. The rationale behind the more positive gold price outlook was a Fund Manager survey for April 2015 which suggested “Investors see growing overvaluations in both bonds and equities and have signaled concern about a valuation bubble forming.”

Specifically, survey respondents thought

• 25% of respondents said global equities are currently overvalued – up from 23% in March and 8% in February, and the highest proportion since 2000.?

• 84% of respondents said bond markets are overvalued, up from 75% in March and the highest proportion in the survey’s history.

?? • A net 68% believe the United States is the most overvalued region.

?? • 18% said currencies is the asset class most vulnerable to volatility, a rise of 5 percentage points.??

• 13% said the U.S. dollar is overvalued against the euro and the yen, sharply up from February’s 12% saying the dollar is undervalued.

We aren’t at all surprised at these findings, only that it has taken the fundies so long to form these opinions. When portfolios are positioned to protect capital from these threats, we are sure gold demand will rise.

If it were to happen in a period of Australian dollar weakness, with the local currency drifting toward $0.65 USD, then that would be a $2300 AUD gold price. A 50% return from levels today would be welcome news indeed!

Short term though there is still down-side risk, with the biggest concern the repeated failure to hold the USD $1200oz mark. Any break in the US Dollar Index above 100 would also no doubt see a few precious metal longs throw in the towel, and contribute to more weakness in the next few weeks.

Technical Picture

Earlier in the week we had a look at the technical picture for gold, which was looking a little soft again. You can read the whole piece here on the blog.

The chart below is probably the one of most importance to readers though. In it, you can see the series of lower highs and lower lows gold has made since the epic price crash of April 2013. As we mentioned in the blog, the recent rally since mid-march seems to have put in a top at the $1225 point. The 50, 100 and 200 day moving averages are in a bearish alignment all pointing south. The RSI is looking weak, there’s low volume and the MACD seen down the bottom of the image below looks like it’s very close to signalling a sell sign and momentum swinging to the south.

We aren’t at all concerned about IF this cyclical bear market will end, but the question of WHEN remains unanswered. The technical picture is questionable at best, and until we see higher highs, or maybe silver or gold mining stocks lead the sector higher, caution is advised. Dollar cost averaging still seems the most appropriate strategy for long-term investors.

An Unhappy Anniversary

Speaking of the April 2013 price crash, this week does mark the 2 year anniversary of the 2 day period that rocked gold investors to their core. I was in Chile at the time, and remember seeing the action in disbelief. The official history will show that the price (using London PM Fixes) dropped from USD $1565oz on the 11th April to USD $1535.50oz on the 12th, before crashing to USD $1395.00oz on Monday the 15th April (the most expensive plane ride I’ll ever go on in my lifetime as I was in the air that day).

Bloomberg’s analysis of the crash put the main reason for the fall down to the slide in global inflation, something that undoubtedly was a factor. You can read that report here.

At the time, we at ABC Bullion also put out some research covering the crash, the reasons behind it, and our view on the matter. We discussed the Goldman Sachs recommendation for clients to ‘short’ gold, and the host of bearish reports and fore-casts from other banks. There was also reports at the time that Cyprus would need to sell their gold in order to cover their debts. For the record, as we discussed at the time, Cyprus’s gold reserve covered 3% of their total debt owing, which is actually at the high end when compared to a lot of other sovereigns. Japanese gold holdings covered 0.30% of their debt outstanding 2 years ago, whilst in the USA it was 2.15%. That was when they owed 16.7 Trillion, not over 18 Trillion like they do today.

Our report from 2 years ago ended with a couple of ‘suggestions’ of what investors could do in the face of a cyclical correction.

Option 1 was to sit and do nothing, and patiently write out the storm. It’s gold and silver you’re investing in after all, the one and only highly liquid asset where you can truly say time is on your side. It’s not going to zero.

Option 2, which is what I’ve done personally, was to treat the correction as a buying opportunity, using the weakness to invest more funds into precious metals. After all, none of the fundamental reasons to own gold have changed, as we discussed then.

Our report is here for those would like to review what we wrote two years ago. We think the content is as relevant now as it was then, and we definitely think the needle is turning in terms of sentiment. It is still very low today, with investors very cautious about entering the precious metal market with any conviction. But that is precisely the kind of sentiment investors should be looking for when allocating capital. Buying assets when they’re already popular is a pretty sure way to lose money over the long run.

United States Recession?

This week we’ve seen yet more evidence that there is a serious slowdown in the United States Economy. Retail sales missed expectations yet again, rising by just 0.4% for the month (ex autos), barely half what the market was expecting. The NFIB Optimism Index also fell to 95.2 points, much lower than what was expected. Business inventories also rose more than expected, a sign that companies are finding it hard to shift product. Finally, industrial production, capacity utilization, housing starts and building permit figures also looked weak.

It all leads to the question, is the United States in Recession already? The answer, technically, is of course no. But the following article from ZeroHedge (a place I am normally hesitant to share stories from), is well worth a read. It highlights the unprecedented collapse in the US Macro Surprise Index (chart included below), as well as handful of other key indicators like retails sales, wholesale sales, and factory orders, which are looking particularly troubling.

With official US inflation benign, it really is difficult to understand why the Fed would even be looking to hike at all this year, but it seems they’ve backed themselves into a corner now, and will keep the market on tenterhooks for some time to come.

A Monetary Lesson from the 1970s

We wanted to finish this weeks report with a link to a video from the early 1970s, which a regular client of ours sent through to me a few days ago. It features and interview with Merrill Jenkins, who defined himself as a ‘monetary realist’, and who had written a book called “Money The Greatest Hoax on Earth”. Also interviewed was a gentleman by the name of Denis Karnoski, who was an economist working for the Federal Reserve of the United States at the time.

For any of you with a spare 30 minutes today or over the weekend, we highly suggest you visit this link on the blog, and watch the video through there.

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. This report was produced in conjunction with ABC Bullion NSW.