Record Diwali Gold Demand

Precious Metals Commentary

The ongoing battle for the USD$1,500 level continued once again this week with gold breaking north on Thursday night to $1,512 at time of writing. Silver has been supported and is trading just above $18 per ounce, but with the Australian inflation numbers this week, the AUD/USD jumped to 69c to see metals for domestic investors somewhat unchanged from last week. Gold in AUD is slightly lower at $2,197 and silver slightly higher at $26.25 The gold:silver ratio has been dropping with silver outperforming over the past 30 days.

We talked about this tightening range for gold, as we appeared undecided as to short-term direction for the past few weeks. We had a couple false breakouts either side of the range and a more convincing move back up through $1,500 last night. Waiting to see if momentum will continue on from this, but the overall trend remains positive on a technical level.

This week saw a much-expected rate cut from the Federal Reserve to 1.50 -1.75 percent, confirming that the latest failed attempt at a rate hike cycle has come to a dismal end. It appears the trend for rates in the US will be back towards zero despite Powell’s comments that these past few cuts will provide enough ‘insurance’. What is interesting, as seen in the chart below, is the past few rate hike cycles in the US peaked, levelled out and then dropped right before the last two recessions. It makes sense after a significant build up in debt during a period of lower rates that the past few hike cycles put a drain on the economy and sent the country into recession. This time the hike cycle has been much smaller as it became quite evident quickly that the US economy was not strong enough to handle the normalisation of rates.

Donald Trump added his opinion to the mix on Thursday night once again, calling for Powell to drop interest rates to a level lower than Germany and Japan. I guess Trump would be in favour of negative interest rates then, as the 10Y German Bond Yield is currently -0.41%.

As for the latest gold forecasts, we had quite a bullish one from ANZ Research this week, suggesting gold could breach US$1,700 in as little as six months, given the current gold to Dow ratio, and expected Central Bank demand. Gold pessimists are starting to dwindle in numbers as the overall sentiment is swinging in gold’s favour. The bank noted:

“With solid fundamentals, gold remains a good prospect for portfolio diversification. The widening gap between spot gold prices and the derived gold price (money supply/total gold reserve since 1963) suggests gold is currently undervalued. Gold could trade above USD25k/oz, if the U.S. M2 supply were backed by gold”.

Interesting to see this sort of commentary coming from ANZ Bank and not King World News.

Click here for ABC Bullion Global General Manager Nick Frappell’s technical analysis released today. He sees the next target at $1,590 with resistance at $1,557 and the market being supported at $1,446.

Record Australian Diwali

Last Friday was Dhanteras - the first day of the Hindu festival of Diwali (festival of lights) - the most auspicious day to buy gold jewellery for Hindus.

ABC Bullion had a record setting Dhanteras despite an Australian gold price only off 5% from record AUD highs. The start of Diwali has always been a busy day for us, but this year we saw trading volumes up 46% on last year.

Even though we pulled in additional staff from our parent company, Pallion, there were lines out the door all day. We would like to thank our customers for their patience.

In contrast, India Today reported that sales of gold and silver were down between 35-40% compared to 2018, with only (!) 6 tonnes of gold worth approximately A$420 million sold on Friday.

Indian consumers were said to be only making token purchases as record-high Rupee prices and economic concerns weighed down on sentiment. According to Rhona O'Connell of INTL FCStone, over the last four-five weeks the Indian gold market has been non-existent.

Long Wait Possible for Platinum Longs

We have noted for months now how undervalued platinum is relative to gold and palladium. The chart below from a recent Heraeus market commentary shows how extreme the current market is, with the platinum:palladium ratio at levels not seen for nearly 20 years and lowest in at least 40 years.

Heraeus noted that while platinum market fundamentals have been weak for several years, platinum supply from South Africa will peak in 2019 as mine reserve depletion reduces production.

Investors are positioning for a reversal with platinum ETF holdings up over 950,000 ounces this year. However, the chart also shows that the turnaround back to a ratio of 3 to 1 could take a few years, so investors will have to take a long-term view on the trade.

Helping Housing Along

The Federal Government is trying to be seen doing something to address high housing prices via its First Home Loan Deposit Scheme, releasing details of it this week.

Such schemes often end up being a Home Owner Subsidy Scheme, as the first home buyers with increased borrowing capacity just bid up prices. However, with a cap on 10,000 loans a year and means-testing there is less risk of house prices being bid up.

The other side of that coin is that the scheme will not mean much for the majority of aspiring home buyers, as it is estimated that there are around 127,000 potential first home buyers who would be eligible. The “first come, first serve” basis of the scheme also doesn’t seem very equitable.

Of more concern should be the half a trillion dollar wall of interest only loans which will transition to principal and interest within next few years.

ABC reported that on average the shift to principal and interest can cost borrowers an extra 30% to 40% with the RBA warning that a lot borrowers would not be able to extend the interest-only period.

RBA interest rate cuts and loosening of bank lending standards may reduce the impact for those borrowers who can extend, but there is still a risk of a fire sale of properties by those borrowers who cannot meet the higher repayments.

While mortgage arrears numbers have been under control in recent years (excluding Western Australia, which is still suffering from a busted mining boom) that may be challenged by interest only loans being renegotiated.

As economist Saul Eslake noted, it is likely that those who could transition to principal and interest probably did it sooner rather than later, meaning that the “people for whom the transition is going to be most difficult is the cohort that is yet to make the transition”.

The implications of transition may account for the fact that Google searches for “Australia Recession” are up significantly, as per the chart below from Fidelity International (as tweeted by David Scutt) and back up to levels last seen at the GFC.

Latest credit growth figures out from the RBA show that housing credit, while still growing, is doing so at levels the lowest in over 40 years. For personal credit the figures also speak to the pressure people are under, contracting for nearly 4 years and at levels last seen in the early 1990s recession and GFC.

Roy Morgan note in their 2019 Wealth Report released this week that Australians’ per capita gross wealth has stagnated in the last six months and dropped by around 1.4% from the first to the second quarter of 2019 to $370,200.

No doubt the weak housing market recently was a source of this given owner-occupied homes account for around half of Australians’ personal asset value.

Over the weekend the AFR reported that the Federal government had been warned by Treasury that the RBA’s interest rate cuts were squeezing bank profit margins. We discussed a couple of weeks ago how this was behind Aussie banks not passing interest rate cuts on in full.

Treasury’s concern is that a lack of full rate cuts to mortgages was hampering economic stimulation. Their solution is for any quantitative easing (QE) by the RBA to focus on buying bank bonds or even by directly lending to the banks, as this would lower banks’ borrowing costs and give them more room to move in passing on rate cuts.

New research out this week by the World Gold Council (WGC) argues that low (or negative) interest rates will weigh down on investor portfolios and that in such a situations increasing one’s allocation to gold was justified.

They note that gold’s performance nearly doubles during periods of negative interest rates.

As a result, WGC suggests that during the current low rate environment investors should increase their gold allocations by an additional 1% to 1.5% above the long-run 2% to 10% optimal gold allocation that their research recommends.

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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