​2019 Starts With a Bang!

Volatility in financial markets continued in December, leading to some pretty amazing moves in forex, equities and precious metals during the break. After recent consolidation short-term, gold in USD continues the battle for the $1,300 handle and we were trading just under this key level this week, but so far resistance at this level has stemmed the rally, with gold retreating to USD $1,288 and silver to USD $15.60.
 
In local currency terms, the AUD has rebounded off the lows and sits around US 0.7185 cents, putting gold in AUD at $1,792 and silver at $21.80 per ounce at time of writing.
 
Palladium continued its stellar run as it broke out to new highs through USD$1,280 and quickly ran to USD $1,322. New talk of China’s plan to introduce policies to boost domestic spending on items such as autos certainly would have helped the rally.
 
Still looking a bit bubbly, and if prices persist to trade at such a huge premium to platinum prices, there is potential risk of auto manufacturers starting to look at substituting the metal for the lower priced cousin, which could benefit platinum prices longer term, and reduce the ratio. Chart below looking a tad overbought to say the least. For more on this, see here.

A lot of articles from the US media are talking about cash being the best performing asset class in 2018, as just about everything except the US Dollar Index (and cash equivalents) finished the year in the red.
 
For local investors, at least we saw gold in AUD terms deliver 8.5% returns for the calendar year and silver lagging behind, as has been the norm for the past few years, ending flat in AUD terms.
 
We did give a few reasons as to why we think silver could rally in a recent December 2018 market update, and indeed we saw silver quickly rise from oversold levels, staging a rally of around 7% over the holiday break in AUD terms, chart below.
 

 
The next test for silver will be if we can break up north of this recent trading range and downtrend line from the 2016 highs as seen in the below chart. The trend for silver the past few years has definitely been flat, but it is a positive when an asset class forms a very long term base for prices to rally from, and encouraging is the fact the silver appears to have found a bottom at the USD$14.00 per ounce level, failing to break south of that level despite every effort from those traders extremely short at the time. Short covering would have certainly contributed to this latest tick higher.
 

 
For those wondering what happened to spur the rally in gold over the break, we continue to see a shift in sentiment in the mind of US investors, leading to increased appetite for defensive assets classes, as there are building doubts as to the Federal Reserve’s ability the raise rates and reduce their balance sheet without blowing anything up, so to speak.
 
For those interested, Grant’s Interest Rate Observer do a Quantitative Tightening report that tracks the reduction in the Fed’s balance sheet, which you can follow here.

 
 
So gold seems to be trading mainly as a fear trade at present, with the level of volatility in US equities driving the price short-term. As the SPX has recovered we see a short-term pull back in gold, but the question investors and traders are asking is whether this recovery in stocks can be maintained or whether it is simply a short-term pop on the way down.
 
The difference with this latest rout in equities is that it has swung the moving averages into bearing formation on the daily chart, which is usually indicative of momentum and overall trend in favour of moving lower. A ‘sell the rallies’ environment perhaps, as opposed to a ‘buy the dip’ scenario.
 
We talked a lot about US equities valuations being far out of touch with reality and historically very high, and we have only recently seen the market start taking Powell’s hawkish motivations seriously, and re-pricing of some of these very high p/e stocks has occurred. Chart below of the S&P500 puts the recent bounce into perspective.
 

AUD Flash Crash

A gift from the market during the holidays for those suitably hedged with gold in their portfolios, as currency markets went a bit haywire whilst we were all on break sipping Mai Tais.
 
The Australian Dollar saw an algo-driven flash crash on the 2nd of January this year, which saw a spike in the AUD gold price to a temporary high of a whopping $1,891 per ounce, whilst only intraday.
 
At one point in the day the AUD was suffering one of the largest daily falls in its history as it lost 5 percent to the Japanese Yen or 4 percent against the USD. At one brief point the AUD/USD was as low as 0.675 US cents, before rebounding sharply.
 
A move through a significant technical level lead to algorithmic traders going bonkers, which was exacerbated by a very low liquidity environment. So when all the robots do the same thing at once with not many humans on the watch, it can lead to some bizarre moves (and potentially some opportunities).
 

 
 
The level of adoption of algorithmic trading across various asset classes has increased in the last decade and it raises the question of how we understand risk management when we have so much faith in machines. For those interested, you can read ASIC’s review on ‘High frequency trading in Australian equities and the Australian-US dollar cross rate’ here.
 

US Government Shut Down, Again…

Lastly, the latest government shutdown in the US was extended this week, to almost the longest ever, as Trump walked out of a border wall meeting, calling it a “complete waste of time”. Usually US government shutdowns occur when the government debt level inevitably hits the debt ‘ceiling’. One would be forgiven for thinking the word ‘ceiling’ might suggest somewhat of a limit, but the usual strategy is to simply ‘raise the debt ceiling’ and take on more debt then ever before. Ironically, since they’ve raised the ceiling about 107 times I would think a more appropriate term might be ‘debt target’ at this point.
 
But it was not the debt ceiling but the wall which is the problem this time, as those with a say scratch their heads and try to figure out a way in which to pay for it.
 
Chuck Schumer accused the President of having a temper tantrum during the latest meeting and for a bit of comedy, here is the apparent summary of the meeting:
 
"He asked [House] Speaker Pelosi, 'Will you agree to my wall?' she said no," Mr Schumer said.
"And he just got up and said, 'Then we have nothing to discuss,' and he just walked out.
 
So the shutdown continues until a solution is found and there are around 800,000 public employees currently working without pay.
 
If the shutdown continues, it should start to negatively affect GDP and if the above exchange is any indication of the lack of leadership in the US, it’s no wonder the government is running deficits and growing an unsustainable pile of debt.

Until next time,
 
John Feeney
ABC Bullion
 
 
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