It’s been a volatile week for precious metal investors, with gold and silver prices easing after the Federal Reserve meeting. The sector had started the week on a more positive note, with gold pushing up toward USD $1180oz, and silver pushing above USD $16oz.

The release of the Fed monetary policy statement changed all that, with gold dropping sharply in the aftermath, and easing ever since. At present, gold is trading at USD $1146oz, whilst silver has fallen to USD $15.61oz.

AUD investors have fared better this week, with the local currency weakening off the back of a low inflation print and increased bets of a Melbourne Cup day rate cut (more on this below).

The AUD has dropped from USD $0.7264 to just USD $0.7080 over the past few trading days, helping support AUD gold prices, which are still trading around $1620oz, whilst silver is sitting at $22.20oz, largely unchanged on the week.

Turning back to the Fed, and in a surprise to markets, their latest statement on monetary policy was widely perceived as hawkish, lifting the chances of a December rate hike.

The full statement, for those interested, can be read here, with the market particularly focused on the statements around household spending and business fixed investment, whilst the lack of reference to global instability was also seen as a hawkish turn.

Personally, we find it amazing that tens of billions of dollars of stocks, bonds, commodities and currencies move in reaction to the words and prognostications of a group of PHD economists, most of whom have a terrible track record when it comes to forecasting what will actually happen in the economy.

And on that note, there was yet more news this week that US economic, and indeed global economic growth remains incredibly soft. In the US, we saw new home sales fall 11.5%, whilst the Dallas Fed manufacturing index was also down.

Durable goods orders fell too, though not as badly as forecast, and consumer confidence was also down. Finally, US GDP for Q3 undershot, rising by just 1.5%, as companies, worried about a build up in inventories, eased back production.

Global Growth Still Weak

This week, AMP Capital released a report looking into global growth. Titled “What happened to growth? And what does low growth mean for investors?” the report summarised that global growth is likely to remain sub-par for a while yet, as it will in Australia.

In terms of what has actually progressed in the “post GFC” environment, AMP pointed out that after registering a growth rate of 5.4% in 2010, we’ve been slowing down, with the rate of growth declining.

Despite the clearly deteriorating trend, the IMF remain optimistic, predicting 4% growth (or thereabouts) nearly every year, only to revise down their forecasts each and every year. The chart below highlights this neatly

As to what is causing lower growth, AMP offer a number of reasons, including

• Never ending calamities (Eurozone crisis, Greece, Japanese Earthquake etc)

• The GFCs lasting impact on confidence, or lack thereof

• Constrained capital spending by business

• Slower growth in debt (can’t say we agree here, especially public debt)

• Rising inequality

• Slower labour force growth

• Weaker growth in emerging countries

The implications for this, according to AMP, will be low inflation, low interest rates, periodic growth scares and a potentially longer economic cycle.

We agree with a lot of the content in the research piece, especially one of the key takeaways, which was the one that stated that average returns are likely to be constrained in the period ahead. That’s one of the great reasons to invest in precious metals.

In fact, apart from the comment re debt levels, the only thing we’d disagree with is that whilst we have low official inflation now, the potential for higher inflation should never be ruled out in a world of ZIRP, NIRP and QE.

We think central banks will end up being far more “successful” than even they hope when it comes to stoking the inflationary bear.

The full report from AMP Capital can be read here.

Long run, we see the present era of lower growth, greater financial market instability and greater monetary uncertainty leading to higher precious metal prices, for reasons we’ve long spoken of.

Short-term though, the pullback in gold of the last 48 hours leaves us with an interesting technical set up.

Technical Update

with John Feeney

The last 48 hours price action have definitely impacted the technical picture for gold, which was down 2.6% in USD last night, with AUD investors protected by the fall in the currency.

We are at a pretty interesting spot for the USD gold price at the moment, as we are at a point where we will soon know if the rally from August represents some meaningful change in sentiment, or if it is yet another dead cat bounce on the way to a lower low.

The pullback so far fits well within the boundaries of what was expected, and we made a comment last week of USD gold potentially heading towards the $1,145 - $1,150oz range. This has indeed happened as USD gold has hit resistance at the technically important level around $1,180oz, and sold off sharply.

Looking at the chart below, gold is sitting right on the 50 and 100DMA. It really needs to form a base here and move higher to confirm a meaningful rally. This would push the 50DMA above the 100DMA, which can signal a shift in a new up-trend.

The MACD indicator is telling us to sell, however since August it has given off a couple of false sell signs which I’ve circled below, so whilst we shouldn’t ignore it, we also shouldn’t focus too much attention on this.

What USD gold does have on its side is the short-term oversold Williams indicator. It is usually a buy sign when this pushes back above the 80 level from being oversold. So a rally from here will be very positive.

The drop of around $45oz US per ounce since the high in August may be enough to scare many new investors, but this is all normal price action and we wouldn’t have expected USD gold to decisively break through $1,180oz on first attempt. The Williams oscillator above was signaling overbought near US$1,190oz and is now signaling oversold and close to a buy signal.

The more important Australian dollar long-term weekly chart is more relevant for AUD physical gold investors and we can see this below. It has been all smooth sailing for AUD gold investors since the upward trend started in 2015. We can see below, based on the exponential 50 and 100 week moving averages that the downtrend that started in 2013 for AUD gold ended in February 2015.

Earlier in the year, we stated that we thought that gold in AUD would not drop below $1400oz. We are more optimistic now, and based on what you can see below, we now think any pullbacks in AUD gold from here toward the $1,500oz range should be seen as buying opportunities.

For long term accumulators, we’d be using the current period as an opportunity to build gold and silver holdings, with a disciplined, regular accumulation plan likely to work out well over time.

A Rate Cut on Melbourne Cup Day

A big part of that AUD gold story is the local currency. And as discussed earlier, part of the weakness in the AUD these past few days has been related to an increase in the chance of a Melbourne Cup rate cut by the Reserve Bank of Australia.

The latest piece of news arguing for a further rate cut was of course Wednesday’s official inflation print, which came in at just 1.5% for the year, whilst the RBA trimmed mean was just 2.1% for the year, way below expectations.

Low official inflation definitely bolsters the chances of a further rate cut, with the interbank futures now giving it a 70% chance that the RBA will make a move whilst the rest of the country has its eyes glued on Flemington racecourse.

From our perspective, we think the bank should wait until December, if only to convince the market that they are not unduly concerned by low official inflation, and also so they don’t appear spooked by the big four banks hiking mortgage rates.

Sam Ferraro, director at Evidente, certainly thinks the RBA should cut, noting a handful of reasons for doing so, which include the fact Australia is in a wage recession, there is no desire to invest amongst corporate Australia, and macroprudential measures are curbing mortgage growth.

We don’t disagree at all with the analysis put forward by Mr Ferraro, and for those interested, we suggest reading his research here.

Our long stated concern though re further rate cuts is that it will not help lift consumer confidence, will not lead to people opening their wallets, and in fact will punish investors wanting to earn a reliable stream of income from their term deposits.

It will also put further pressure on the AUD, raising the cost of everything we import. There is also a chance not much of the rate cut gets passed on to mortgage and investment property loan holders as well, with some of the banks now warning they won’t pass rate cuts on in full, as a result of APRA’s interference.

In short, we don’t think it’s a worthwhile strategy for the RBA undertake, and we’re quite certain they’d rather not have to act. But in truth, whether its next week, next month, or early next year, the market will force their hand, and lower cash rates are all but certain.

It will be positive for precious metal prices in due course.

Until next week

Warm Regards

Jordan Eliseo

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.