Silver Stirs, Bitcoin Battered, and More Trouble Down Under

Precious metal prices are on track to end this week largely unchanged, having pulled back from mid-week highs. Gold is currently trading at USD $1318oz, where silver is at USD $16.52 and in Australian dollars, gold is at AUD $1693 whilst silver is trading just above AUD $21oz.

US President Trump announced his plan to introduce tariffs of 25% on imported steel and 10% on imported aluminium. Europe has already threatened to ‘retaliate’ (though they already have tariffs on some goods imported from the USA into the EU), with warnings of an eventual escalation into a ‘trade war’ emanating from a number of politicians and journalists.

The departure of senior economic advisor Gary Cohn originally spooked markets and led to gold popping, though this gain was short lived, with the yellow metal easing back from around USD $1335oz in the last 48 hours.

A large part of the pullback occurred overnight, after a dovish ECB helped spark a move higher in the USD.

Elsewhere this week, we’ve had a slew of monetary policy meetings, including in Australia, Canada, and Europe, whilst the bank of Japan is meeting today. We also had the Italian elections over the weekend, delivering a ‘hung parliament’ with support moving to centre-right, anti-establishment parties.

On the whole, markets have digested all this news in a fairly calm fashion, with bond yields, currencies and in equities more or less unchanged on the week, despite the daily gyrations.

Back to precious metals, and whilst the market remains in a consolidation phase, there are encouraging signs. Silver looks incredibly cheap (more on this below), whereas gold-stocks as a whole are also oversold.

This gives us some confidence that we are close to a break higher in the sector, though perhaps gold needs to have one last clean out of speculators below USD $1300oz before it pushes meaningfully higher.

When this decisive move occurs remains to be seen, however, with non-farm payrolls due tonight in the United States, we may not have to wait long.

In other gold related news, it seems the Hungarian central bank is following in the footsteps of its European cousins in Austria, Germany and the Netherlands, and will repatriate national gold reserves, bringing them home from London.

More on Silver

As regular readers of our market updates know, we’ve become very optimistic about the outlook for silver in the last few weeks, and expect to see it outperform gold by quite some margin in the next two to three years.

Our primary reason for this of course is the extreme gold to silver (GSR) ratio that we see today, which is still close to 80:1, way above the historical norm and at the kinds of extremes we’ve only seen a handful of times in the last 30 years.

This week, Florian Grummes, a technical analyst worth following, wrote a detailed article looking at silver, which he described as “one of the last real contrarian investments on this planet.”

His article, which is worth a read in full, and can be accessed here, had some great charts and observations, noting the incredibly low commercial short position in silver, which, combined with a net short position from speculators, bodes very well for higher prices.

It also included this great chart, which shows sentiment towards silver. As you can see, it is currently pretty close to “peak pessimism”, which is typically a good time to think about buying into an asset class.

Source: Florian Grummes

Whether or not silver is for you is, of course, a personal decision, but in terms of my own portfolio, I’ve recently switched my ABC Bullion Gold Saver account to 100% silver, adding to my holdings on a weekly basis.

Bitcoin Battered

Bitcoin prices had almost doubled over the last month or so, recovering from their crash from circa USD $20,000 to USD $6,000 with a move back toward USD $12,000 per coin. Long-term believers were encouraged by the recovery, with many a forecaster stating the correction was over, and that prices were to continue their relentless climb higher.

Evidence of this was seen in a recent Finder survey, who surveyed a handful of leaders in the fintech industry on their cryptocurrency price predictions for the year. Amongst the group, the average price prediction for Bitcoin suggests it will end the year trading at over $29,000 per coin, a handy tripling of one’s money were they to invest today.

The bullishness isn’t limited to Bitcoin either, with expectations that other cryptocurrencies like Ripple, Dogecoin and Cardano will see price increases ranging from +500% to +2920%.

You can see the results of the survey in the image below.

Source: Finder

Thought market participants are still incredibly bullish, the price action in Bitcoin itself has again deteriorated, with the coins currently trading back below USD $9,500, having fallen through both the 50 and 100 day moving averages.

The pain is being felt across the cryptocurrency space, with a large number of the most popular coins falling, including Ethereum, Bitcoin Cash and Cardano.

There is, as ever, no end of conjecture as to what is driving the market right now, with a great article on Business Insider looking into the sale of Bitcoins by the trustee of Mt Gox (at one time the world's largest crypto exchange but which ended up filing for bankruptcy in 2014), and whether or not that helped play a part in Bitcoin’s crash toward USD $6,000 earlier this year.

Given the current weakness, and the outlook from a technical perspective, we could easily see Bitcoin fall all the way back toward USD $6,000, and potentially in quite rapid fashion. This aligns with the view of Florian Grummes, who wrote the article above silver I mentioned above. Discussing cryptocurrencies, he noted that; “Bitcoin has not been able to sustainably move above the 38,2%-Fibonacci retracement level (around 11,300 USD). This is a strong sign of weakness which argues for further downside pressure. In such an environment it is extremely important to accept that the current trend is down and the “times of easy money” are over for now.”

As to where Bitcoin ends up its in this latest down cycle is impossible to tell, though I’m relatively sure surveys of crypto-experts won’t be predicting a tripling of ones money within a year when the market has truly bottomed.

More Trouble Down Under

Australian economy bulls have had another week to forget, with the release of yet more data highlighting the pervasive softness in the local economy. The headline this week was obviously the release of the latest GDP figures, which came in at just 0.4% for the quarter, and 2.4% for the year, with the quarterly result well below market expectations.

Across the nation, there is now minimal growth in GDP per capita (a better measure of living standards), with the country increasingly reliant on our record levels of immigration to keep the economy growing at all.

This is made clear in the following chart (also from Business Insider), which highlights the fact that of the 2.4% total growth we saw in the economy for the last year, a whopping 1.6% was driven by population growth alone.

It wasn’t just the GDP figures that disappointed, with retail sales growth registering just 0.1% for the last month, well short of market expectations, which suggested we should be on the lookout for an increase of close to 0.4%.

Even iron ore, our key commodity export, is on the way down again, declining by close to 10% in the last few days, whilst the latest monthly inflation data was negative. Sydney house prices also continue to ease, now having fallen for 26 weeks in a row, according to CoreLogic’s dwelling value index.

To be fair, there are some bright spots too, with non-mining investment on the rise, the collapse in mining investment largely over, and a boost from public investment into infrastructure, whilst net exports and company profits are also reasonable.

Interestingly, according to a recent update from AMP Capital, 92% of companies either raised or maintained their dividends in the latest reporting season. AMP’s take on that is that this figure means businesses are confident that they’ll be able to maintain earnings into the future.

The less optimistic take on it is that it highlights the fact that the desperate ‘search for yield’ continues, and that in an era of record low interest rates, boards are loathe to disappoint income dependant shareholders when it comes to their dividend cheque, which is being prioritised ahead of capital investment, a critical input for productivity growth.

Either way, when we look at our ‘scorecard’ which incorporates some of the key drivers of the Australian economy up, we simply can’t see how or why the RBA would hike rates, which is what the market thinks the next move will be. After all we have:

• Inflation running below the RBA’s target band

• Record low wage growth

• Record high private debt to income

• Extremely low growth in retail sales

• A stagnating/falling East Coast property market

• GDP comfortably below market expectations and unlikely to meet optimistic RBA and Treasury forecasts

Add all that up and we still expect them to cut eventually, however reluctantly, and even though it will likely be of minimal/no use in stimulating the economy.

Given the implications for the AUD as this plays out, over time it will likely prove a boost for investors with a portion of their wealth invested in overseas markets, including local precious metal investors.

Until next time.
Jordan Eliseo

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