Gold and silver prices have been in free fall this week, as increased odds of an interest rate hike by the Federal Reserve next month have battered sentiment toward precious metals.

At present, gold is trading at USD $1106 an ounce, down USD $80 per ounce, or some 7% from the highs it had reached in later October 2015. Silver has suffered a similar fall in USD terms, currently trading at USD $15 an ounce.

Local investors have not been spared this week either, with gold in AUD easing the better part of AUD $100oz, with the AUD still holding above USD $0.70.

The Reserve Bank decision to hold interest rates helped support the local currency, though most forecasters still see further downside in the cash rate over the next few months.

And part of the reason for that is the RBA still seem far too optimistic regarding the outlook for the local economy, with their latest statement of monetary policy predicting a stabilisation in our terms of trade, and growth heading back towards 4% by the end of 2017

With the mining capex boom not even half way through unwinding, residential housing construction slowing, a complete dearth of business investment in the country, negative real wage growth, and declining growth in immigration, this is never going to happen, unless the government turns on the stimulus tap in a way that would have made even the previous Labor government blush.

Further rate cuts should nudge the AUD lower, which will help boost local precious metal prices.

Yellen is a DOWK

Whilst local market commentators have spent plenty of time and energy focusing on the RBA, most of the world was yet again transfixed by Fed chair Janet Yellen, and her latest musings re the United States economy, and the outlook for monetary policy in the USA.

We will not cover the specifics of the latest economic news coming out of the United States, except to say they remain poor and remain a million miles short of what once would need to see a genuine economic recovery (which we define as a permanent end to QE, normalised interest rates and balanced budgets).

But markets, as they are wont to do, are totally central banker obsessed, and most have perceived mutterings from the Fed as hawkish of late. This has seen the odds of a Fed rate hike by December 2015 skyrocket in the last few weeks, from barely 25% to over 50% as we speak.

A strong non-farm payroll report tonight will only strengthen expectations of this hike. How these trends have developed, and the impact they’ve had on the gold price, can be seen very clearly in the chart below.

But it does bear mentioning that whilst the market is focusing on the hawkish mutterings of the Fed, Yellen has not shed her dovish wings. After all, this week, she was very clear that

• The US economy might be strong enough to warrant a rate hike in December 2015, and that (that’s the hawk)

• If the US economy is not strong enough, we may even see negative interest rates in the United States (there is the dove)

For this reason, we have decided to label Janet Yellen, or more accurately, the Fed itself, as DOWKs (pronounced DORK). In this instance, a DAWK is a part DOVE (DO), part HAWK (WK), an utterly confused bird that promises to fly in two directions at once.

We have no doubt that over the next few years, markets will come to mock these DOWKs, a far cry from the adoration they are currently showered in. As that process plays out, we expect to see metals price head higher.

But short-term, uncertainty in the metals space will not dissipate, particularly for USD investors. We cover this below in a short technical update.

Technical Update

with John Fenney

Looking at the charts, we had to see some consolidation and for gold to hold $1,120 US to be confident in the latest rally. In the last market update we identified the upward trend line form July, which has now broken, mainly on the back of confidence in likelihood of a US Fed hike and the implications for the USD.

Most of the weakness in the US dollar gold price of late has been based on purely on the Fed, and the USD rally. As such, it shouldn't be too concerning for AUD investors, even though the USD strength that is on the cards obviously has potentially negative implications for USD gold.

With that in mind we’ll look at both the US dollar chart and the AUD GOLD long-term chart, which is most relevant for Australian gold investors.

A few bullish signs on the charts for the US dollar at the moment, which really ties in to mainstream sentiment towards the ability of the Fed to pull off a rate hike cycle. Although we don’t expect this sentiment to last forever, in the short-term we can see a higher USD. The MACD just signal a buy sign and somewhat of a breakout can be seen below.

The USD strength is obviously negative for US gold prices, but in turn should see the AUD continue to lose ground. A look at the long term AUD Gold Chart highlights where this market is.

What you can see above is a very regular pullback within an overall uptrend for AUD Gold.

The Williams oscillator, circled at the bottom of the chart is yet to signal overbought, so we may see low AUD $1,500 range as a possibility, but one can never be certain.

Either way, this is much better buying this week than last weeks mid $1,600 range.

Indian Gold Scheme Update

India’s much mooted gold deposit and gold bond scheme is moving along, with news out this week that the Indian government has fixed interest rates for the schemes at 2.25 to 2.50%.

Medium term loans will be for gold deposited for 5-7 years, whilst long term loans would see Indian citizens handing over their gold for 12-15 years.

Whilst we wouldn’t personally participate in such a scheme, we aren’t necessarily as sceptical as some are about this scheme. As we’ve long stated, gold is money, and provided the owner of that money is willing to take the credit risk of lending, they is no reason they shouldn’t be able to do so, in exchange for interest income.

In essence, I see little difference between this and the loan of dollars I myself, and I dare say 99% of people make to whichever bank they have their savings account, or term deposits with.

We also don’t think the scheme will lead to a reduction in gold demand from India, which some analysts have predicted.

If the upcoming Diwali period, which we look forward to every year, has taught us anything, its that Indian demand for gold is so ingrained in their culture, there is little financial innovation will do to alter that. Indeed, we see Indian gold demand rising in the next few years, owing to high savings rates, incredibly favourable demographics, and rising disposable incomes.

With that in mind, we are looking forward to Monday, and the festival of Dhanteras, which is traditionally the most auspicious day to buy gold.

You can read more about the Indian scheme here

The Latest with Bitcoin

We don’t tend to cover Bitcoin that much here at ABC Bullion. It’s not because we aren’t fascinated by the technology (we are), or think that it has broader applications in the financial marketplace (we do).

We just don’t think it’s the same as gold, or silver, or precious metals – even though there are some characteristics which are similar.

Despite that, there are clearly periods in time where Bitcoin mania takes hold, and the last few weeks have seen it happen again, with the price of Bitcoin soaring, as you can see in the chart below. That’s quite a spike.

Devaluation of the Chinese Yuan, and fears over Chinese capital controls are being credited for the recent surge, though this seems somewhat simplistic.

Regardless of its cause, so impressive has this recent rally been, and so unlike the performance of gold in the past few days, that it has led some to declare Bitcoin is the “new gold” again, and that it has “replaced gold”.

We remain unconvinced, for reasons we explained in detail in an article back in January 2014, which you can read here. In that report we noted that;

“It’s critical to separate the arguments in favor of Bitcoin as a monetary transmission mechanism, and ensure this is not confused with an argument for or against Bitcoin as money itself. Whilst there has been clear technological development with Bitcoin and it does have significant advantages vs. more traditional means of moving money or facilitating transactions (all subjects Greg’s article touched on for which I agree with wholeheartedly), this does not make Bitcoin itself a good form of money over the longer term.

Consider this; It was only a decade or so ago that internet banking really took off and it became the norm to transfer money via your PC or smart-phone. In the old days you went into a bank, or you wrote a checque. Undoubtedly, the transmission mechanisms for moving FIAT money are infinitely more efficient today, but they in no way make the money itself more valuable.

This is important to keep in mind. Whilst some Bitcoin fans, although not all, see the adoption of Bitcoin as a payment mechanism by retailers (for example Overstock) as ‘proof’ of Bitcoins monetary value, in my opinion this is not so. That’s not to diminish the Bitcoin protocol, but for retailers, accepting Bitcoin is also another way for businesses to drum up sales.

It is also worth noting that, at least in the case of Overstock, whilst it accepts Bitcoin as payment, it doesn’t keep them, converting them to USD. Many businesses that “accept Bitcoin” are also doing this, using a payment processor called BitPay. In this sense it’s no different really than from when credit cards went mainstream in supermarkets and department stores, meaning you no longer needed to write a cheque, bring physical cash, or put things on lay-by.

Bottom line: We wish investors in Bitcoin the very best of luck, and we can certainly think of worse speculations in a world where financial markets are trading at record highs, completely divorced from economic reality. But we would caution people not to confuse a potentially attractive speculation with a time tested form of wealth preservation. For the latter, which should be priority number one in uncertain times like these, nothing will do the job like physical bullion.

What next for the stock market

Before finishing this weeks market update, we wanted to share a stock market chart we ourselves had never seen before, which we found of particular interest. The chart plots income tax receipts and how their growth rates have changed over time.

What is uncanny is how the points at which tax receipts have traditionally rolled over have coincided with major corrections in the share market.

As per Charles Hugh Smith, whose blog the above chart comes from, “Anyone who sold stocks once the 6-year annualized change in real local/state tax receipts started declining would have been spared the horrendous, bone-crushing losses of the Bear markets that subsequently shredded stocks.”

Smith went on to note that “The annualized 6-year change nailed the top of the market in 1989, 2000, 2008--and now, in 2015. This leaves current bulls with the task of explaining why an indicator that has reliably top-ticked every previous market top for over 40 years is suddenly and magically wrong in 2015.”

You can read more about this here, but from our perspective, we certainly think the best times for the financial asset relief rally we’ve seen since 2009 are largely behind us, with real returns incredibly difficult to find going forward.

Therefore, whilst the non-farm payroll report due out in the United States overnight could well see gold shoot back below USD $1100oz, and re-test what was looking like major support at the USD $1080oz level, we wouldn’t panic sell.

But with the global economy still deteriorating, and central banks running out of road, we remain convinced we are in the midst of a major buying window for physical precious metals.

I’ll be taking advantage of it as soon as I hit send on this report.

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.