Precious metal markets have traded in a relatively narrow range this week, with market participants waiting patiently on the impending Federal Reserve interest rate decision, which will be handed down next week in the United States.

Gold and silver are currently trading at USD $1,072.90 and USD $14.24 an ounce respectively, more or less unchanged from the previous Friday. In Australian dollar terms, the metals are still on sale, below AUD $1500 and AUD $20 an ounce respectively, areas that have proved good buying over the last year or so.

In this week’s market update, we are going to look at the technical outlook for the gold market right now, as well as the latest futures market positioning. We will also cover some of the main reasons to own gold, including the embedded “option value” in gold, should it be remonetized at some point in the coming years.

We are also going to look at the latest employment numbers published in Australia, and why they are quite literally unbelievable, especially considering the slowdown we are seeing in so many parts of our economy.

But before we do that, we wanted to share our personal thoughts on the gold industry, and its importance to the Australian economy, in light of ABC Refinery’s recent LBMA accreditation.

ABC Refinery, LBMA Accreditation and the Australian Gold Industry

As some of you regular readers of our market updates will already know, ABC Refinery, the producer of ABC Bullion gold and silver products, was on Friday the 4th December 2015 appointed to the London Bullion Market Association’s (LBMA) Good Delivery List for gold.

For those of you who haven’t seen the news, you can read about it at the ABC Bullion website here.

This is obviously an exciting and positive development for our company, and will give many of our clients even greater comfort dealing with us, owing to the stringent assaying and bar quality criteria that the LBMA insist on, not to mention the net tangible asset requirements that must be satisfied in order to gain accreditation on the list.

Be that as it may, it is clearly not in and of itself a reason to invest in physical precious metals, which is the area we typically focus on when writing market updates for our clients.

The reason we mention it today is because it gives us a good opportunity to discuss the importance of the gold industry to the Australian economy, and what makes gold a unique commodity within the Australian marketplace.

Firstly, some facts worth sharing to highlight the size of the Australian gold mining industry, many of which come courtesy of the Gold Industry Group, an industry body that represents the interests of the Australian gold community, and of which ABC Refinery is a member.

• Australia is the second largest producer of gold in the world

• Australia produces close to 280 tonnes in 2015

• The industry directly and indirectly employs 50,000 Australians

• The gold industry generates approximately $14bn in export revenue

As should be clear from the above figures, irrespective of whether you are bullish, bearish or ambivalent about the future direction of gold prices, anyone interested in a healthy and growing Australian economy should be hoping for a healthy gold industry, as it has been and will remain a key employer and source of export income.

It is also worth pointing out that, due to the resistance of gold to the business cycle, and its unique supply/demand fundamentals, it is the one relative “shining light” in the Australian commodity space right now, with iron ore, coal and the like all facing incredibly challenges right now, and a difficult few years ahead. Gold miners in Australia on the other hand are generally doing very well, with their ability to bring down costs, and the relatively high AUD gold price helping support margins.

But gold is a ‘unique’ commodity in the Australian marketplace for another reason too. And that reason is that, unlike other commodities like iron ore, a large part of the ‘value add’ work that occurs in the physical gold space actually occurs within Australia.

When we think of iron ore, we can all picture the enormous port facilities built in Western Australia and the like, and the tens of thousands of tonnes of the raw commodity that is shipped overseas, where it is turned into steel and the like.

Gold on the other hand is not typically exported as a raw commodity, with the refining taking place within Australia. And that is true not just for the domestically mined gold, but also some of the gold which is produced within the region, with gold miners in parts of Asia sending their product to Australia so that it can be refined into the internationally acceptable investment grade product that is sought after all over the world.

Going even further than that, there is also a healthy jewellery design and fabrication industry within Australia, of which Pallion, as the largest precious metal services business in Australasia, is at the vanguard, whilst of course low interest rates, continued economic uncertainty and financial market volatility are leading to growing investor demand for physical gold too, especially within Australia’s $600bn Self Managed Superannuation Fund market.

As such, the physical gold industry is truly unique within the Australian economy, for it is something that goes way beyond mining, and the logistics required to support it. It also touches high-end manufacturing and discretionary retail, as well as banking, finance and wealth management.

With an economy that is facing no shortage of challenges right now (more on this below), the gold industry could well be one of the few bright spots in an otherwise difficult period ahead.

And with that, it’s back to the markets.

Technical Update

With John Feeney

The charts we produced last Friday were signaling oversold for the precious metal complex, and were indicating a rally was likely. Whilst that rally hasn’t eventuated this week, the charts are telling much the same story, with the weight of evidence suggesting gold could move higher from here. The market is undoubtedly playing a waiting game until the FOMC meeting takes place next week, on Thursday morning our time.

Last week we stated $1,445 AUD levels were oversold and expected a bounce. We got this on Friday night, with the market moving higher and AUD gold heading back toward $1500oz. Were it not for the unbelievable Australian jobs numbers (literally unbelievable as they are simply not credible), then the AUD would be lower and AUD gold may well be over $1500 already.

We still have a bullish signal on the MACD, but again we will have to wait and see how the market reacts to the FOMC announcement next week.

The waiting game that the market is playing has shown up somewhat in volume, which has been a little light. We’ve circled the decrease in volume on the chart below, which also shows RSI and MACD for gold in USD.

The Commitment of Traders chart below also looks interesting. The below chart shows the net positions of both large speculators and commercials. The great reduction in commercial short positions is usually a bullish sign, but gold is still yet to rally.

Interesting to note that Commercials’ net position was almost 50-50 dead even on the 1st of December. What would be very interesting (and somewhat unlikely) would be if we see Commercials moving net-long gold.

It would probably take the Fed leaving US rates on hold to do this, which would seriously dent their credibility, but if this were to occur it would be the catalyst to send prices higher.

We’d have no doubt that were the Fed to hold rates, or perform a ‘dovish hike’, of perhaps less than 25bps, then we’d also see speculators who are sure the market want to cover their positions.

This is something UBS covered recently, stating that the risk of a short covering rally in gold remains elevated. According to UBS; “Market positioning suggests that the gold market has also been preparing itself for a Fed rate hike – net speculative longs are currently at the lowest in 14 years.”

UBS went on to note that the most recent CFTC data show gross shorts are at 93% of the record, with the bank noting that; “extreme short positioning suggests that the risk of a more dramatic short-covering rally is currently elevated,? particularly if a rate hike is accompanied by dovish rhetoric.”

The potential for a pop in the USD gold price and a weakening of the local currency do open up the potential for a proper ‘Santa rally’ for Australian gold and silver investors, and should set the market up well for 2016.

The Screaming Fundamentals For Owning Gold

Our last gold specific ‘story’ of the week is the suggestion that you click to read on the following report, titled “The Screaming Fundamentals for Owning Gold”. Note that it will take about 15 minutes to get through, so it might be one for the weekend.

It has some great charts in there on central bank gold demand, growth in debt vs. growth in GDP over time, potential gold prices assuming money were at least partially backed by gold, gold mining discoveries, the GLD ETF, and some of the main reasons to own gold, which include:

• To protect against monetary recklessness

• As insurance against the possibility of a major calamity in the banking/financial system

• For the embedded 'option value' that will pay out handsomely if gold is re-monetized

For those of you with the time, it’s well worth a look.

Ideas Boom Working?

We wanted to finish this market update with a look at the latest Australian employment data. Officially, the Australian jobs market is booming, with the economy supposedly adding 71.4k jobs last month, on top of over 50k jobs the month before.

Its fair to say the result ‘smashed expectations’ with most commentators expecting the number to come in at minus -10,000 jobs, and led to all kinds of celebrations amongst government ministers and some sections of the Australian financial media, who’ve been trying to talk up the Aussie economy and gloss over the threats posed by falling commodity prices, an unwind of mining capital investment, the likely peak in home construction and the upcoming closure of our car industry.

The result is literally too good to be true, and it’s disappointing to see any commentators give any credence to the number, especially when the ABS themselves are warning about the questionable quality of the numbers.

To put it in perspective, the idea of Australia creating 71k jobs in any given month is the equivalent of the US economy creating circa 1 million jobs in a month, once you adjust for population size.

For more detail on just how implausible this result truly is, we’d suggest you read this report, published by Macrobusiness this morning.

In it, they describe the Australian economy as a “giant iron ore securitisation product”, an apt description of a country that for many years had it so good with the value of our dirt soaring, and our appetite to leverage the income earned into asset speculation, primarily bidding up the price of each others houses.

The dream run has come to end, an there will be no innovation boom (welcome though it is) to hand the baton on too, with a painful rebalancing set to play out over the next few years.

Short term though, these jobs numbers, plus the recent GDP results have added upside pressure to the Australian dollar, and reduced the chance of a rate cut in February 2016 by the RBA.

It is also therefore putting some downside pressure on the Australian dollar price of both gold and silver, something we should treat as an Xmas buying opportunity.

Until next week,

Jordan Eliseo

Disclaimer

This publication is for educational purposes only and should not be considered either general or 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, and 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.