Precious metals continue to impress, with another impressive week for the gold and especially silver. In US Dollars, the gold price continues to consolidate around the $1250 per troy ounce level, whilst it is again sitting comfortably above AUD $1600 per troy ounce, despite the continued strength in the Australian dollar, which was pushing above USD $0.78 earlier in the week.

This week also saw the launch of the Shanghai Gold Fix, with the Shanghai Gold Exchange starting a twice daily fixing system, an unsurprising development considering the growth of the gold market in China. The first fix was set at 256.92 per gram (circa $USD $1233.85 per troy ounce), according to Bloomberg.

Solid though gold has been, silver has again been the stand out performer, with gold’s little cousin building on last week’s gains, currently trading just above USD $17 per troy ounce, up another 5% for the week.

The performance of silver has caught the attention of the mainstream financial media, with articles in Reuters and Bloomberg featuring the move. Buying interest has noticeably picked up at a retail level, and there is clearly a pick up in demand from Asia as well, with Lee Cheong, from Gold Dealers in Hong Kong noting that, “there is heavy buying in silver in Shanghai, and that has triggered buying in gold as well”, according to the aforementioned reports.

Angus Nicholson at IG markets also commented on the move, noting that; “There are two major factors driving the rally in silver: Chinese stimulus and negative interest rates. Silver, unlike gold, has far more industrial uses, and the significant uptick in Chinese stimulus evident in its large increase in credit growth and investment spending in its 1Q data has been immensely beneficial to a whole range of industrial commodities. Silver and gold also arguably function a lot like zero-yielding bonds, making them less desirable as global interest rates increase and more desirable as global interest rates decrease. Currently, more than a third of government bonds globally have negative yields making zero yielding assets comparatively quite attractive. Of the four major global central banks, three of them are still currently in easing cycles. In such a scenario, even if the Fed does manage to raise rates once or twice this year, it is unlikely to make a major dent on the uptrend in silver and gold.”

That sums up the current mood very neatly, with a handful of commodities, including iron ore, rallying hard in the last few weeks. Some analysts see the rally as overdone, whilst others think another spike is coming.

Personally, we are happy to have been accumulating on a regular basis over the last few months, and will continue to do so, confident that the long-term cycle has much further to go, and that patient investors will be duly rewarded.

My colleague Nick Frappell has updated his detailed technical report from last week with another look at silver.

Silver: Updated Technical Outlook

by Nick Frappell

21st April 2016

After the decent break that took place on Tuesday the 19th, it looks worthwhile to have a quick visit to the Weekly Charts and ratio charts to see how the picture has moved on since the report written last week.

Silver Weekly Ichimoku Cloud

The Weekly Ichimoku is notable for showing the first break-up above the cloud in around four and a half years, years in which silver ground lower and then spent range-bound during the last 18 months, in what bulls would hope is a process of long-term consolidation.

Now that the price itself is above the Weekly Cloud, it is important to look for signs of further confirmation to give buyers the confidence that this is a significant break.

The next obvious resistance is the high made on the 22nd May 2015 of US$17.78, and it would be normal to expect silver to struggle with that on the first attempt. The most powerful technical confirmation would be for the Lagging Span to follow the spot price above the Weekly Cloud top. The Lagging Span, visible as the blue line in the chart above, is the closing price translated back 26 periods, or 26 weeks in the above example. This means that the price needs to close above US$18.00 in order to get above the Weekly Cloud top at the moment – a big move. In about 10-12 weeks the cloud top actually declines to US$16.235, so it gets easier for the Lagging Span indicator to follow on up through the cloud itself.

The Daily Point and Figure (20 US Cents box size 3 box reversal)

The chart above has developed another (huge) target since the break, however for all practical purposes we can put it aside as a price target of US$29.40 could take many months or even years to reach.

The hourly 0.428% log Point-and-Figure

The price continues to hit the targets outlined on this chart, although filtering out today’s highs, and has generated a downside price target back to the break-out level.

The gold-silver ratio (60 min 0.20 box size)

Price action on the gold-silver ratio reached 72.80, just breaking through the support line mentioned on the daily chart in last week’s commentary.  The target to 75.80 implies a degree of consolidation in silver soon.

Futures positioning on the CME – Managed Money sector

Longs added almost 44 million Troy ounces at a VWAP of US$15.52 in the period between April 5th and 12th. Shorts closed out some 19.33 million Tozs during that period.

ETF positioning

ETF positioning has barely changed since the last week – standing at 641,420,014 Troy Ounces on the 20th April.

Silver Eagles

Continue to show good demand, with 2.912 million in sales reported as of the 20th.

Summary

The confirmation signal to focus on in the longer term is the break out of the Lagging Span above the Weekly Cloud top.

Supports basis the weekly cloud as of the 20th April are:

Weekly Cloud top                US$16.24

Weekly Turning Line            US$15.93

Weekly Cloud base              US$15.60

Weekly Standard Line          US$15.44

US Economy: The Big Four and the US Consumer

One of my favourite analysts who covers the United States is a gentleman by the name of Doug Short, who is the VP of Research at Advisor Perspectives. His research frequently appears at the website financialsense.com, which was one of the first places I learned about the investment case for precious metals, well over 10 years ago now.

This week, Doug has an update, looking at what he calls “The Big Four”, which are the four big indicators that are typically believed to heavily influence the NBER Business Cycle Dating Committee, whose job it is to officially identify recessions (yes – even this requires a committee).

Those four factors are believed to be:

• Nonfarm Employment

• Industrial Production

• Real Retail Sales

• Real Personal Income (excluding Transfer Receipts)

There has been a noticeable slowdown in some of these indicators, especially industrial production, which has fallen 2% in the past year. The latest results for real retail sales have also weakened, whilst figures for real personal incomes are also soft.

The chart below highlights how the average of the big four indicators has evolved since 2007, with the cratering throughout the GFC and subsequent improvement (QE, ZIRP and deficit financed thought it may have been), clearly evident.

What you can also see is that the cycle is clearly turning, with the average of the big four peaking back in late 2014. We like this chart because in many ways it sifts through the noise of day after day of multiple economic data releases, the vast majority of which are useless at helping one determine the strength or otherwise of the economy, and the potential investment implications.

The weakness, and the ‘rolling-over’ of this data is one of the reasons why more and more economists are starting to predict a potential US recession in 2017, and why most are so doubtful about the pace of interest rate hikes the Federal Reserve would have us believe they are planning to implement in the coming months and years.

The potential for this to unfold won’t come as any surprise to readers of ABC Bullion market updates, as we’ve been highlighting the underlying weakness in the US (and indeed global) economy for many years.

Tony Sagami, who writes a weekly report titled Connecting the Dots, commented on the slowdown in the US economy this week, as well as the stresses consumers are feeling, and the rise of Bernie Sanders.

Sagami noted that most Americans are still doing it tough, which is not surprising when you consider the fact that;

• 39% of American workers make less than $20,000 a year.?

• 52% of American workers make less than $30,000 a year.?

• 63% of American workers make less than $40,000 a year.

• 72% of American workers make less than $50,000 a year.

These are the very people that have seen their net wealth decrease in the aftermath of the GFC. They’ve also largely missed out on the QE and ZIRP induced Wall Street party. The end result is unsurprisingly a consumer who is, if not outright concerned, at least lacking confidence, as the following chart highlights.

Irrespective of who ends up in the White House, and no matter which way the Fed turns, we see this situation getting worse before it gets better, which it will.

If you would like to read the articles from Short or Sagami, then you can find them here and here.

Gold as a ‘Risk Off’ Asset

Whilst silver has been the best mover of the last few weeks, gold is still in the news, with analysts at RBC seeing the price moving higher going forward, with expectations that inflation will pick up, supporting the precious metals.

Whilst many people recognize gold as an inflation hedge, we think its role as a ‘risk off’ asset, minimizing losses when equity markets are declining, is sometimes under-appreciated.

It is for this reason that gold’s role as the ultimate risk off asset is something we discuss frequently in market updates, as we think its ability to protect capital when equities are falling is one of the most important reasons any truly diversified investor should have a gold allocation in their portfolios.

This week, we came across some research from March 2016, from Salient Partners, discussing the Three T’s of protecting equity based portfolios, which highlighted neatly the role gold can play in a portfolio.

The following chart highlights the role of Gold, and other asset classes, compared to the S&P500, looking at returns when the rolling 12m return for the SP500 was -10% or worse.

That is a compelling case for gold, for as you can see, apart from 30 year treasuries (the performance of which going forward is highly questionable), nothing outperformed gold in environments where the equity markets fell hardest.

Cash protected capital, though obviously did little to add to returns, whilst Hedge Funds and Commodities (the SPGSCI) also saw major declines in capital, with expensive fees and potential liquidity issues another concern to contend with if you are investing in hedge funds to minimize equity market risk.

The whole report (only 5 minutes) is well worth the read.

One point within the research note that stood out was the supposed downside to holding gold as a hedge and as portfolio protection, with the research suggesting that gold is not an efficient investment vehicle, and that it “has not offered consistently strong returns”.

We find those arguments somewhat strange, as gold returns over the entire 1971-2016 period have appreciated at close to 9% per annum with the figure 1% to 2% higher or lower, depending on which currency you are referring to.

As for it being “consistently strong”, there is an element of truth to this, but the same could be said for equities, which have done very well over the long-run, though suffered heart wrenching corrections along the way.

Cash is the only consistent asset out there, though it comes with a government guarantee of devaluation over time. Worth less and less by the day! Potentially worthless over the long-run.

Indeed considering gold’s primary role as a portfolio diversifier and reducer of risk, it stands to reason that it will not perform each and every month, quarter or year.

One can of course try to time markets, and work out when gold will pay off, as one could with equities or any other asset class, but we aren’t convinced there are many people who can do that successfully time and time again.

That’s not to say that we disagree with the broader points Salient are making, as we vehemently agree that robust risk management, alternative assets or investment strategies and downside protection are necessary elements of any well diversified portfolio at the best of times, and especially in today’s world of economic and monetary experiments.

We have no doubt that institutional investors can and will benefit from the trend following and tactical growth strategies that Salient highlight. But as per their own research, the average performance of gold in those extreme risk off events for broader equities exceeds that of these strategies, though in fairness it remains to be seen what happens in the future.

This is not to say that one is ‘better’ than the other, but merely to point out that physical gold, which is highly liquid, instantly recognizable, and has zero credit risk has a proven track record as safe haven asset.

Institutional investors, as well as retail clients, SMSF Trustees and the like will all benefit from holding it as a core asset in the years ahead.

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.