Market Update: Gold steady as 'TINA' meets 'FOMO' in the stock market

Gold prices have enjoyed a steady week, up just over $10oz from last Friday’s London PM Fix, and currently sitting at USD $1261oz. Silver is also up marginally, sitting at USD $19.23oz.

It’s been a relatively uneventful week for the precious metal complex, and indeed for global economic data, after last weeks ECB interest rate decision, and US Non farm payroll report.

Major news this week out of the USA will actually come tonight, when retail sales are announced, with analysts hoping for a strong print to signify that the consumer is more upbeat, especially with US Q1 GDP figures coming in at -1%.

The biggest economic news for the week was the news from the World Bank, which downgraded their growth forecasts for 2014, from 3.2% to 2.8%. Citing weakness and/or slower growth in the US as well as in China, whilst also focusing on the fact that the crisis in the Ukraine would have affected Russia too.

Despite the downgrade, they are more optimistic about the second half of the year, stating "Despite the early weakness, growth is expected to pick up speed as the year progresses".

Interestingly enough, they see more strength in developed market economies but lower rates of growth from the developing world. This is sure to pose a challenge to overall global growth levels, seeing as developing markets had outperformed so markedly leading into, and immediately after the GFC.

The Sydney Morning Herald carried a short article on the subject earlier this week, which you can access here.

When 'TINA' meets 'FOMO'

The heading of this weeks market update is actually related to the stock market, and comes after an interesting post I read on Livewire Markets, where Charlie Aitken (one of the better know stock market commentators out there) stated that “the current market conditions are what happens when TINA meets FOMO”.

TINA stands for the ‘There Is No Alternative’, in that many investors now believe that there is no alternative asset class other than stocks, which can offer investors the desired after tax yield.

This is being combined with the more generally known expression, FOMO or ‘Fear of Missing Out’, whereby many investors, even though they know equity valuations are stretched now, and there is a lot of risk in the markets at these levels, don’t see any end in sight to this bullish equity run.

As such, they have FOMO and are entering the market regardless, but this is not without significant risk. Rhett Kessler of Pengana capital states “The mountain of cash sitting in term deposits at increasingly unattractive interest rates means retail investors are vulnerable to entering the market at a level where the potential return does not justify the risks”.

We can certainly understand why investors are long stocks in a ZIRP and QE world, and that thinking is perhaps best summed up in this excellent piece by Ambrose Evans Pritchard of the Daily Telegraph in the UK, discussing the Japanese stock market, Japanese pension funds and the Bank of Japan. Click here to access the article.

Despite the ‘bullish’ thesis for stocks based on perpetual QE, we wouldn’t want to be all in, and feel very comfortable holding a sizeable allocation to gold rather than betting it all on continued stock bull market.

Regional Gold Demand Analysis

Back to Gold and the World Gold Council had some updated regional gold demand statistics out this week, which they update regularly via their quarterly publication on gold demand trends.

As regular readers know, whilst the market is completely obsessed with the US Federal Reserve, QE and developed market central policies in general, the heart of the physical gold industry has moved East and now resides in China (and to a lesser extent India).

To help highlight how short sighted the fascination with the US really is, consider the following table, which comes from the latest World Gold Council data, showing that US physical gold demand (jewellery and bar and coin combined) accounts for only 33 tonnes of gold demand, out of more than 850 tonnes of total gold demand for Q1 2014.

Source: World Gold Council

As you can see, physical gold demand in the USA is insignificant, 3% of total global demand, and barely 1/10th of what China demands. Futures trades can focus on the Fed all they like, but the real story continues to be in the East.

The link to the report where this data came from, including a breakdown from most countries can be found by clicking here.

Market Positioning in Gold

The Best report by far for the week that I read on gold, came courtesy of one of my favourite commentators, Alisdair Mcleod, who looked at the current positioning in gold and silver futures markets.

As the charts below show, managed money short positions for both gold and silver are near (for gold) or above (for silver) all time highs. These are the groups that are typically short-term momentum chasing speculative traders (hedge funds etc).

As you can see from the above chart for gold, managed money gold shorts are now back at around 75,000 contracts. It’s no coincidence that the peak in this chart corresponds neatly to the June and December periods last year, when gold went sub $1200oz.

The silver chart above is even more alarming, or exciting, depending on your point of view. Managed money silver shorts are now over 40,000 contracts, or over 200,000 ounces of silver at this point, significantly shorter than they were at any point last year.

Both of these charts suggest that a serious short squeeze could eventuate in the precious metal space in the not too distant future, with a potentially significant rally should these short term traders need to unwind their positions.

The full article can be accessed here.

A final (short) comment on your super

As a final comment for the week, and with the end of June fast approaching, it might be a good time to check your super balance and the asset allocation of your fund.

As this short piece by Roger Montgomery discussed (citing research from Challenger), there are huge risks in the superannuation system, and the aging population is but one of them.

The standout comment is the following (bolded emphasis mine). “The generational avalanche is underway – the Baby Boomers are beginning to retire and Australians are living longer. Such is the magnitude of the shift that Challenger has estimated that in ten years time, the proportion of an individual’s assets that relate to post-retirement income will increase from 30 per cent to 40 per cent”.

The implications of this are significant, especially in light of the fact that most balanced growth funds have such a large allocation to shares. As more and more Aussies retire, and look to start drawing down on their assets, what had been a source of demand for shares will no longer be there.

Making matters worse, even more Australians are retiring with significant quantities of mortgage debt. As a result, you can expect many of these people to want to take a huge portion (if not all) of their superannuation as a lump sum payment, so that they can clear their debts. Again, this won’t bode well for the system as a whole, or for younger Australians whose contributions into super will essentially be propping the system up.

This article can be accessed here.

Might be time to look at your superannuation and make sure you’re happy with how it’s invested.

Until next week

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.