After the violent sell off that took place at the start of last week, it hasn’t been surprising to see the precious metals sector consolidate, with bullion prices essentially unchanged over the past five trading days.

The gold market is currently sitting at USD $1,085oz for gold, whilst silver is still trading below USD $15oz, with the market for both metals set to pull back 7.3% and 5.5% in USD terms for the month of July.

Australian dollar investors have been protected by the fall in the dollar over the course of July, with metals prices in AUD set to fall 3.25% for gold and just 1.12% for silver this month.

Sentiment towards the market remains incredibly bearish. We are seeing some banks predict a short-term rally in the market, though most think it will prove short lived, with the dominant themes of a USD rally, a Fed interest rate hike and broader commodity price crashes underpinning the lack of buying enthusiasm for the precious metal sector.

The overwhelming bearishness (which we see as a good sign), is best summed up in the chart below, which shows the net position for hedge funds in the gold futures space. As you can see, hedge funds are actually net short gold today, something that hadn’t been seen in over a decade.

The majority of this has been due to the record gross short position in the gold futures market, which we reported on last week, but clearly, many speculators who were previously long gold have thrown in the towel.

The importance of this development in terms of future price moves is difficult to overstate. As you can see, back in 2011, hedge funds were net long approximately 250,000 futures contracts. That is of course the time when the gold price was roughly USD $1,900oz and looking like it might head ABOVE the magical USD $2,000oz mark. Back then, nearly all of speculators in the market were confident better of even higher prices.

Today, AFTER the price has dropped 40% in USD terms, hardly anyone is long gold, with most speculators wanting to bet on a gold price BELOW USD $1,000oz.

Short-term this could become self-fulfilling, but we see the above chart as a very bullish development for the precious metal market. After all, as Wall Street legend Bob Farrell once commented; “When all the experts and forecasts agree—something else is going to happen”.

Slower Growth

This week saw further confirmation that this period of slower global growth is going to go on for a lot longer than policy makers the world over would hope. The United States, which had been the relative bright spot over the last couple of years (compared to Europe and Japan especially), saw Q2 GDP figures released, which showed a increase of just 2.3%, well short of market expectations.

The Wall Street Journal summed it up best when they stated that; "the economic expansion--already the worst on record since World War II--is weaker than previously thought, according to newly revised data."

The journal went on to note that; “Since the recession ended in June 2009, the economy has advanced at a 2.2% annual pace through the end of last year. That's more than a half-percentage point worse than the next-weakest expansion of the past 70 years, the one from 2001 through 2007.”

The fact that the two weakest expansions of the entire post WWII era have been those which occurred since the turn of the century strongly back up the thesis that we’ve reached a debt saturation point, and that ever cheaper credit is having less and less of a stimulatory effect on the real economy, even if it can add to the wild rides in financial markets.

The GDP print wasn’t the only tepid piece of news out this week regarding the US economy. Pending home sales fell in June, whilst the year on year gains in the Case Shiller home price index fell to below 5%. We also saw consumer confidence fall, and perhaps most importantly, further concerns re durable goods. Whilst the headline number beat expectations, the more important number, durable goods ex transports still looks very weak, as the following chart makes clear.

Bottom line to all of this is that the Federal Reserve will not be meaningfully hiking rates anytime soon. A lack of official inflationary pressures, potential stressed in financial markets, and the sluggishness of the US economy will stop that from happening.

Accumulating physical gold and silver through this period remains a prudent strategy, volatility notwithstanding.

ABC Bullion in the news

We’ve kept this week’s update a little shorter than normal, mostly as there are a couple of articles wanted to share which we think will be of interest. The recent volatility in the gold market has obviously piqued the interest of the financial media, and we were delighted to discuss the latest developments with both the ABC and the Finance News Network this week.

Our interview with the Finance News Network, which can be viewed here, fleshed out further our thoughts about the supposed “death of gold”, which we discussed in our market update last week, as well as the role gold can play in a SMSF portfolio, why physical gold is preferable to other bullion exposures, and the kind of upside we see in precious metals in the coming years for Australian investors.

The interview with the ABC, which took place inside our sister company Custodian Vaults, not only looked at the recent announcement re Chinese gold buying, but also what is happening in the Australian gold mining sector, and the importance of the physical gold industry to the Australian economy as a whole.

It can be viewed 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.