Gold up 12% for the year. Aussie housing declines.

It’s been a mixed week for precious metals bulls, with the price of gold originally retesting the crucial USD $1,300oz mark, before pulling back to current levels around USD $1,285oz.
 
Silver has also suffered mixed fortunes, trading north of USD $17oz before an overnight pullback saw the metal fall to USD $16.50oz.
 
The proximate cause of last night’s pullback was a better than expected revision for Q3 GDP.
 
Despite the overnight pullback, gold is still up roughly 12% for the year, and still sits comfortably within a trading range between USD $1260oz and USD $1,300oz.
 
The charts still look relatively supportive, with gold currently sitting right on its 50 and 100 day moving averages, with strong support likely at the 200 day, which is at USD $1,267oz.

In Australian dollar terms, the yellow metal is back testing the AUD $1,700oz level, whilst silver is trading just below AUD $22oz, as markets recalibrate interest rate expectations in Australia, with the chances of a 2018 rate hike by the RBA fading fast.
 
Gold in AUD terms is likely to be well supported anywhere north of AUD $1,680oz, and especially around AUD $1,660oz, so whilst there is a chance of a pullback, this is a reasonable place to be adding to positions from our perspective.
 
ETF flows continue to be supportive for gold, highlighting the fact people are looking some diversification given the all time highs we are constantly seeing in risk assets.
 
The performance of gold stocks (which often outperform to the upside) is less convincing so far, with GDX and GDXJ still trading within normalized ranges.  
 
Physical demand from India and China is subdued, though steady, with the following chart at least indicating an uptick in volumes coming into China from Hong Kong and Switzerland over the last 3 month, even if the year on year figures are less impressive. 

Source: Capital Economics
 
All up, we see the market as being relatively balanced, though the rise in real yields (particularly at shorter end of the curve) over the last year remains a bit of a concern.
 
From our perspective, we’ll continue to add to our gold holdings incrementally.

Bitcoin Continues to Soar!
Unless you’ve been living under a rock, you’d know by now that the price of Bitcoin (BTC) continues to soar, with the world’s most famous cryptocurrency blowing through the magical USD $10,000 mark this week, a level some precious metals enthusiasts see gold reaching one day.
 
The speed of the price gains is truly a sight to behold, with the following tweet from Mark O’Bryne of GoldCore highlighting the number of days each $1,000 move in BTC has taken: over 8 years to get from $0 to $2,000, yet less than 8 months to move from $2,000 to $10,000.

The final thousand dollar move, from USD $10,000 to USD $11,000 a coin took place in the last 24 hours.
 
Wow indeed!
 
The popularity of the coin continues to soar alongside its price, with some articles stating Coinbase (one of the largest BTC trading platforms) now has more accounts than Charles Schwab.
 
In Australia, everyone from Uber drivers to SMSF trustees are trying to cash in on the crypto-boom. Indeed, earlier this week, whilst flying to Melbourne for work, I had a detailed conversation with my Uber driver on all things financial markets, and his recent investment purchases, which I then shared via social media (see image below).

Let’s just say that 90% of voters can’t be wrong, and the Uber driver had indeed recently bought BTC, though I was pleased to hear he had done so with only a small amount of his net worth, and had already cashed in some gains. I can only hope many other late to the party investors in this mania do the same thing.
 
As is always the case when markets move like this, projections of price gains grow more outlandish by the day, with ex-hedge fund manager and cryptocurrency investor Mike Novogratz this week telling CNBC “Bitcoin could be at $40,000 at the end of 2018. It easily could.”

We've been asked to share our views on Bitcoin in a range of interviews and media appearances too, with articles in news.com.au, Kitco, and Nestegg, whilst we’ve also done podcasts with Business Insider, and have more to come with Livewire Markets, to name a few.

For those who haven’t had a chance to read the detailed report on Bitcoin, gold and “the future of money”, you can access it at this link, with the key takeaways being;

• Don’t invest more than you can afford to lose

• Be very careful about chasing a parabolic move higher in any market

• Do not confuse BTC with physical gold and silver, which remain the best way of protecting wealth in the decade ahead

As a final comment on BTC for now, I think it's safe to say that no matter whether you think it's a bubble, a bargain, a ponzi scheme, or it truly is the future of money, there is no question BTC is the most exciting story in finance, and it’s amazing to watch it unfold.
 
Latest on Australian Housing
Whilst Bitcoin has been getting all the headlines lately, there have been some serious developments in the Australian housing market. Price growth has largely rolled over, with values starting to decline, even in parts of Sydney.
 
The outlook is poor too, with auction clearance rates falling significantly. Core Logic are reporting clearance rates of 66% for Sydney, down from 77% last year, though Real Estate Institute of NSW (REINSW) president John Cunningham thinks the number, in a worst case scenario, could be as low as 40%, due to the large number of results that aren’t reported at all.

The pain is particularly acute in the apartment market, where stories of 20% to 30% declines are becoming more frequent, whilst the number of for sales signs lining Sydney streets definitely seems to have picked up, even if the stock is not shifting.
 
Either way, it seems the “wealth effect” from rising prices has come to a crashing halt, which bodes poorly for an already sick retail sector (Myer are apparently reducing the number of hours workers will be rostered on for in the Christmas period, a sure sign how tough it is out there in the consumer discretionary space).
 
Of further concern too is the expected downturn in housing construction, with the HIA predicting that housing starts will decline by some 20% over the next three years.

Given the importance of the consumer to the Australian economy, and how housing construction had helped wean the economy off the mining capex boom to date, if house prices drop, construction declines, or some combination of both – it is hard to see how the RBA has any chance of hiking interest rates next year, or indeed for years to come.
 
Indeed, we remain of the view they will cut at least once in 2018, which, given market expectations, is a key reason we are bearish the Australian dollar.
 
This obviously flows through to our optimism on the return outlook on physical gold and silver for local investors in the years ahead.
 
Until next time.

Jordan Eliseo
Chief Economist
ABC Bullion

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