In Case of Financial Emergency…

Precious Metals Commentary

Gold recovered this week but looking back a few months it is still bound within a $1,680/$1,750 channel.

On the path to $2,000 this sort of consolidation is necessary and looking back over a couple of years it could continue to trade in this range and still be in an uptrend from its bottom around $1,200 in late 2018.

Silver has had a strong recovery from its COVID bottom in March and is sitting around the mid-$17 as we write, with the gold:silver ratio staying below 100.

We noted last week that the AUD/USD was looking a little stretched and this week it lost 1.5 cents to trade at 68.5. This helped local prices, with Aussie gold gaining 4.3% as it got back above $2,500 and silver moving up 60 cents to $25.70.

Break the Glass

The US Federal Open Market Committee met this week and made no change to interest rates, which remain at zero.

In the press conference that followed, Fed Chair Powell said that they would continue to use their “lending powers” “forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery”.

The repeated reference to “powers” in the press conference lines up with bond king Jeffrey Gundlach sarcastically characterising Powell as "Superman" in his latest webcast. Gundlach said, however, that Powell’s “kryptonite” is negative rates, which he says are fatal to the banking system. To-date the Fed has said it would not be considering them although we note they haven’t ruled it out either.

Gundlach remains very bullish on gold long-term, expecting it to reach new highs, and is also bearish the US dollar, which he says will devalue against most other currencies.

The Reserve Bank of Australia (RBA) also kept interest rates on hold at its meeting last week and indicated that it would remain there until “progress is being made towards full employment” and inflation was back to their 2–3% target. They forecast that their three-year interest rate target will hold until 2022, so Aussie savers can expect to earn very little for a few years yet.

While the RBA has said that a negative cash rate would be “extraordinarily unlikely”, Westpac’s Bill Evans argued for them saying it would “provide a considerable boost to Australia’s international competitiveness through exerting downward pressure on the AUD”.

We would just note that downward pressure on the AUD equals upward pressure on gold and silver in Australian dollars.

Evans trots out other supposed benefits to negative rates, namely “incentivise institutions and corporates to invest and employ; boost asset prices; and lift disposable incomes”. We agree that it will boost asset prices but as we have said many times before, zero or negative rates don’t lift disposable incomes of savers, just borrowers.

If the chart below of the Westpac/MI consumer survey is an indication, people are less interested in borrowing.

Since the Global Financial Crisis (GFC) in 2008, the average person has become considerably cautious, saying that the wisest place for savings is a bank deposit or paying back debt. COVID will no doubt reinforce this sentiment.

With Australia entering its first recession in 29 years, Digital Finance Analytics estimates that the percentage of households in mortgage stress reached 37.5%, or 1.42 million households. If the Government is brave enough to allow JobKeeper payments to end in September, and banks put an end to mortgage repayment holidays, that could quickly result in and uptick in mortgage defaults.

As to the idea that low rates incentivise investment, that will not happen if the assessment of entrepreneurs is that the prospects for the economy are so bad that they won’t be able to make any money (and by definition, isn’t the economy in a bad way if you have to consider the abnormality of negative rates?).

In our view, zero or negative rates just encourage projects that normally would not be productive, or worse, speculation.

But nothing to worry about there and certainly no speculation going on by the 80,000 new investors who bought car-rental company Hertz (on the millennial-focused fintech stockbroker Robinhood) even though it filed for Chapter 11 bankruptcy protection.

Interestingly, we checked out a website which reports on the popularity of stocks held by Robinhood users and found that gold, if we aggregate the major gold ETFs, has 40,000 holders. As a group, that would only rank around #160 and well below the 240,000 holders of a stock necessary to crack Robinhood’s top 20.

As we have said before, gold is not yet on the radar of the mainstream.

For us the most concerning reply by Chairman Powell was to a reporter question whether “there is a possible [stock] bubble blowing [or] … capital misallocation that will leave us worse off when this is over”.

He didn’t acknowledge whether this was, or was at risk of, happening and said that they would not hold back “because we think asset prices are too high” if the economy was not at “maximum employment and stable prices”.

While he said that “we're not -- we're not focused on moving asset prices in a particular direction at all” and that “when the time comes, after the crisis has passed, we will put these emergency tools back in the toolbox”, we would give a hat tip to Ben Hunt from Epsilon Theory who many years ago noted that such emergency measures will become permanent measures as capital markets are transformed into political utilities.

As he says, “our entire political system relies on stocks going up. If stocks don’t go up, our public pension funds and social insurance programs are busted, driving our current levels of wealth inequality from ridiculously unbalanced to Louis XVI unbalanced”.

Talking of toolboxes, we will give the last word to Scott Minerd of Guggenheim Global, who we mentioned back in April when he said that silver was his number one conviction trade.

In his latest post he discusses the likely policy tools the Federal Reserve would use as the economy remains mired in a protracted downturn and at the end he says that there is one final tool “we cannot avoid discussing”.

Minerd says that the US dollar has been slowly losing market share as the world’s reserve currency and with the Fed effectively financing US Government debt, the risk that it comes under speculative attack increases.

In the case of that financial emergency, he says that the Fed will have to “break the glass” and buy gold, as the “accumulation of gold as a reserve asset historically has been seen as a responsible policy response in periods of crisis” and “may very well become the policy option of choice in the future”.

As Bart Melek from TD Securities says, a downward trend in real rates, concerns surrounding fiat currency debasement and skyrocketing debt making debt jubilees appealing to some should see investors choose gold as their in case of emergency fire blanket.

TD Securities are forecasting a bumpy road towards their target of over $2,000 in the latter part of 2021 which, if that coincides with the Australian dollar getting back down below 60 cents, would translate into an Australian gold price over $3,500.

Until next time,
 
John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.

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