Market Update: Gold Bounce, “Trumpathy” and Dow 30,000!

Investors in both gold and silver have enjoyed a solid first month of calendar year 2017, with the price of both precious metals in USD rising by 5.30% and 8.40% respectively.
 
Contributors to the recently completed LBMA 2017 Forecast Survey are generally optimistic on the outlook for all the metals, with an expectation that gold, silver, platinum and palladium will all rise, with silver leading the way, as per the table below.
 

 
Interestingly, whilst the average forecast from these analysts only suggests a moderate increase, there is a definite bullish skew within the ranges they’ve quoted for potential highs and lows for gold during the year, with the average forecast on the high side sitting at USD $1379, which would be a gain of 16% from current levels.
 
On the downside, forecasters only see prices falling as low as USD $1101 per ounce in a worst case scenario, a decline of just 7% from current levels, indicating most precious metal analysts think the 2015 lows around USD $1,050 per ounce really did mark the low for this cycle.
 
Despite the solid start, and the broadly positive outlook expressed by LBMA forecast contributors, overall market sentiment toward the sector remains ambivalent at best. Most financial market participants are still expecting the US Dollar to march higher, the Fed to follow up their December 2016 rate hike with continued tightening this year, and further boosts to equity prices, with January 2017 the month that the Dow Jones finally broke through the 20,000 point barrier, though it has since fallen back below that level.
 
All of that, should it come to fruition, would no doubt act as a major headwind for gold prices, in USD terms at least, though how all of these things play out remains to be seen.
 
The Trump factor will of course be a relevant one for the precious metal sector, as it will be for all asset classes, though we think its only a matter of time before financial market, social and political commentators get bored of reacting to every tweet he sends, or Executive Order he issues from the White House.
 
The very fact that there are now apparently apps and algorithms that have been set up to trade based on Trump tweets, and analysis based on his busiest tweeting times (see image below) mean we surely can’t be far too far away from #peakDonald!
 

 
Not a moment too soon we’d say, for whilst one need to search too hard to find daily headlines containing terms like Trumponomics or Trumpflation or even Trumpaggedon, we’re fast approaching a point of complete Trumpathy, which we’re defining as apathy regarding any news about Donald Trump!
 
On the positive side for gold in 2017, we see continued inflationary forces building under the surface, which should help support prices. This much was made clear in some research from Blackrock, which was contained in this news article, and featured the following chart of Owner’s Equivalent Rent (OER) in the USA.
 

 
Housing costs makes up circa 40% of the inflation basket in the US, and it is tearing higher now, rising at its fastest pace in a decade. Medical costs (which nearly always outpace overall inflation growth) are also now increasing at their fastest rate since 2008, whilst wages, and inflation expectations are also beginning to trend higher.
 
Should this continue, it will likely only be a matter of time before it is reflected in higher prices for historically sought after inflation hedges, of which gold is most certainly one.
 
Gold will also be supported by continued QE which is taking place in Europe, the UK and Japan, with stimulus still running well in excess of USD $100bn a month.
 
Markets tend to overwhelmingly focus on the Fed and the USD gold price alone, but for investors outside the US, gold has been doing its job protecting wealth in local currency terms, with the global gold price in a noticeable uptrend since the middle of 2014, as the chart below makes clear.
 

 
On the downside for gold, one can’t ignore the set up for the US dollar, which looks like it may well be close to completing a period of consolidation that was inevitable after its huge move between August and mid December 2016.
 
This can be seen in the chart below, which comes from this article here.
 
 

 
 
The Yellen Fed, should it meet market expectations for rate hikes this year, will almost certainly help push the USD higher, though they’ll be opposed by a White House that wants to lower the dollar and stimulate American exports!
 
Typically a strong dollar will hold gold back, though there are scenarios and timeframes where both gold and the dollar rise together, especially if the dollar strength is in part caused by a ‘risk-off’ event which stimulates demand for all safe haven assets, including precious metals.  
 
Gold is still getting some love from the hedge fund crowd too, with well known investor Crispin Odey stating that “Gold is one of the few things you should own”, warning that most financial assets are now historically very expensive, whilst productivity and wage growth have flat lined.  
 
Demand for the yellow metal should also be supported out of China, with a late January 2017 note from UBS suggesting that sentiment toward the yellow metal is “noticeably more positive on gold this time around versus the same period last year”, with fears over potential capital controls and currency weakness key drivers of renewed interest in gold.
 
The other factor which can’t be ignored is the outlook for stocks, which have rallied hard since Trump won the White House, driven by investor enthusiasm for all the goodies he promised, including substantial cuts to corporate tax rates, and deregulation of energy, health-care and financial services.
 
The question investors will have to answer this year is; “What’s in the price”. We know Trump wants to do all of these things – but if investors have already bid equities up in anticipation of them, then successful implementation may not necessarily result in a further boost to equity prices.
 
This is an especially relevant consideration considering valuations are already stretched, with a January 2017 review of the US stock market by Doug Short suggesting that the market is now 78% overvalued, based on an average of four primary valuation indicators.
 
One can’t also help but be a little worried about what happens to equities next given the latest headlines in financial media around Dow 30,000, best captured in the image below, which highlights one of the latest front pages from Barron’s, as well as a front page from the same publication less than a year ago, when the rise of Donald Trump was one of the primary factors being blamed for the deterioration in equity markets we saw in early 2016!
 

 
Sentiment sure has changed, with an AMP Capital update, which you can read here, containing a great chart that highlighted the extreme optimism investors were displaying by end 2016, which is typically a bearish sign for the stock market (indeed every market).
 
As that report states, corrections in the stock market often accompany a new new President entering the White House, something that may well happen again considering how bullish sentiment has been of late.
 
Should equities disappoint, it will obviously help gold, which has historically been the best performing defensive asset when stocks decline meaningfully.
 
All in all we tend to agree with the overall sentiment expressed by Dominic Frisby, who claimed that he was “not wildly excited about gold in 2017, but I just can’t be bearish”, in an article contained in Money Week in late January.
 
The bottom line is that right now, the gold market, and precious metals more generally, have a number of conflicting forces that are influencing prices, some positive, some negative.
 
Anyone who wants to hold a robust portfolio well suited to navigate this economic, market and monetary environment will almost certainly want to include precious metals in their portfolio, which will obviously support prices, especially if we do see more political flare ups, risk assets disappoint, or the USD falls!
 
That said, the headwinds hanging over the market should not be ignored.  As such, the oft-repeated adage of dollar cost averaging still seems an appropriate way of approaching the precious metals market as we move through 2017, and is something I’m doing with my own money every single week.
 
What next for the Australian dollar
 
Driven by a continued move higher in commodity prices, and a pause in the USD rally, the AUD has started 2017 on a incredibly strong note note, rallying from the low USD $0.71 range all the way toward USD $0.76, a move of some 6% which has helped keep a lid on the AUD precious metals prices, with gold in local currency terms essentially unchanged over the year, trading close to AUD $1,600 per ounce.
 
Our primary view remains unchanged from the end of last year, which is that this bounce in commodity prices which is driving the AUD rally will prove temporary, though I do think the worst of the lows price wise have been seen. Indeed the best of this rally has maybe already been seen, with Australia seeing a massive surge in its trade balance in December 2016, driven by a boost both in the volume and prices earned on our key commodity exports.
 
This may last a little while longer, but we still expect the AUD will weaken across the course of the year, in part driven by a continued weakness in the domestic economy, and a narrowing of interest rate differentials between Australia and the United States.
 
For evidence of that domestic weakness, consider the latest research from CoreLogic, which suggested some 20% of Brisbane units were re-sold at a loss in the September quarter (see chart below), whilst in Melbourne, 10% of units sold at a loss.
 

The wealth effect from rising Australian property prices is definitely now limited to those owning houses in Sydney and Melbourne, with the rest of the property market far less rewarding, whilst building approvals have also rolled over, which will limit employment growth going forward.
 
We are also interested to see the latest results from Virgin Australia, whose business sales witnessed a 5% year on year decline in Q2 of this financial year. Hard to believe there is a genuine pick up in business activity in the country if that is happening, though things may have improved in January.
 
In terms of where the currency heads, we watched a presentation from Capital Economics on the 1st February, where their Chief Economist suggested an end of year target for the local currency of USD $0.65, with the potential for two more rate cuts in the second half of 2016.
 
Ultimately we still think rates will fall even lower than 1% in the coming years, but the projections from Capital Economics, as well as Morgan Stanley who are also bearish on the AUD right now sound about right in terms of what to expect in the remaining 11 months of this year.
 
This alone would send precious metal prices in Australian dollar terms higher, with a USD gold price of $1200 per ounce and a currency sitting at USD $0.65 working out at an AUD gold price of $1846 per ounce. That would be a tidy 15% increase from the levels today, and would leave this precious metal bull more than satisfied.

Until next time,
Jordan Eliseo

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