This is Why You Own Gold!

Precious metal prices have held their ground this week as global stock markets continued to crater. Gold is currently sitting at USD $1,233oz whilst silver is at USD $14.74oz, both largely uncharged on the week.

In local currency terms, gold is sitting just below AUD $1,750oz whilst silver is just below AUD $21oz, with the Australian dollar last trading at USD $0.7078.

The kind of market environment we’ve seen over the last month or so is exactly why investors can benefit from owning gold, as well as other precious metals. Yet again, it has helped protect wealth in an environment of falling asset prices, balancing out a portfolio of investments.

In terms of equity markets, they are on track to finish the month of October down more than 5%, with the following tables (courtesy of Bloomberg on the morning of Friday 26th October) highlighting the performance over 1 month and one year in North America, Europe and Asia, including the ASX.

North American Equity Markets

European Equity Markets

 
Asia Pacific Equity Markets

Australia is a particular standout amongst developed markets, down over 8% in the last month alone, with the local market now well and truly below 6,000 points.

Fall of an Australian Icon

The share prices of our major banks have been under pressure for some time, with declining rates of lending growth, an uptick in arrears, more regulatory pressure and the spotlight of the Banking Royal Commission all helping push prices down by well over 20%, as we discussed in this market report from two weeks ago.

Troubling as the share price performance of the big 4 banks has been, nothing prepared the market for the bloodbath in the share price of AMP, which yesterday fell by almost 25%, a key contributor to the almost 3% fall in the Australian market overall.

The financial services powerhouse, which saw half year profits drop some 75%, is now trading at its lowest levels since it was demutualised two decades ago, with the price some 80% lower than where it sat in 1998, as the chart below shows.

Whilst some will take pleasure in seeing a company like AMP, which has had no shortage of scandals exposed by the Royal Commission suffer this fate, it’s a sad day for Australia to see an icon fall like this.

The company traces its routes back to 1848, manages over AUD $100bn of Australia’s wealth, and employs thousands of Australians, the vast majority of whom are decent, hardworking people.

It’s not good news for Australia, and it doesn’t bode well for the immediate outlook of the economy when a genuine Australian icon gets savaged the way AMP did yesterday, with the only winners short sellers of the stock.

Short Covering in Gold

For some weeks, we’ve been warning about the potential for a short covering rally in gold, as the market had become incredibly stretched, with record short positioning amongst managed money speculators.

Over the last week, we’ve seen this in action, with over 45,000 short contracts removed from the market.

To put that into context, and to highlight the speed at which short positioning changed, see the chart below, which comes from this excellent update from Faraday Research.

The chart highlights the weekly change in gross short gold positioning, with the average weekly change sitting at just 5.6k contracts.

Last week’s move was comfortably the largest weekly change in gross short positioning on record, with the date going back two decades.
 
 

Short-term, gold has some work to do to push above USD $1,240oz, a level it failed to push through earlier in the week.

Indeed, the yellow metal could fall all the way back to USD $1,210oz to USD $1,215oz levels, which would keep it within its recent trading range, with the market maintaining its bullish posture.

Central Banks Keep Buying

One area of continued support for gold prices is the purchasing from central banks. As many readers will know, as a group, central banks turned net buyers of gold in the aftermath of the GFC, and have been adding to their holdings ever since.

This year, central banks are expected to add approximately 450 tonnes of gold to their holdings, a 20% uplift compared to 2017, with purchases again being led by Russia who have a clear strategy to reduce their holdings of US financial assets, with gold the obvious replacement.

USD Gold Price vs. Rest of the World

Before moving onto silver, we wanted to share the chart below, which was produced by our good friends at Incrementum Asset Management.

It shows the world gold price, as well as the gold price in USD, with the USD price the one that dominates media attention and therefore investor perceptions of precious metal investing.

As you can see, the world gold price clearly bottomed out in late 2014, and is now 4 years into a clear uptrend that Ross Norman of Sharps Pixley quite rightly defined as a stealth bull market.
For Euro and GBP investors, the metal has returned 4.3% and 5.6% per annum over the last four and a half years.

For investors in other gold buying nations like China, Russia, India, Turkey and Switzerland, there have also been meaningful gains, demonstrated in the clear uptrend in the world gold price since 2014.

Gold may have been flat in USD over the last 4 years, though even in USD the uptrend from late 2015 is becoming clearer. Should it catch up to the rest of the world, we will likely have some very good years ahead.

How Cheap is Silver?

Whilst gold has been in the headlines the last few weeks, silver has largely been ignored, with the gold to silver ratio (GSR) increasing over the course of October from 82 to 84. The GSR is telling us loud and clear that relative to gold, silver is cheap.

As another illustration of how cheap it is, consider the chart below, which shows the price of silver since 1970, but using the 1980s CPI basket formula. According to this analysis, silver is currently at all time lows.
 

To be clear, we aren’t expecting the price of silver to match this inflation adjusted high, and using a CPI basket from nearly 40 years ago is sure to throw off some quirky results.
Nevertheless, it is a useful indicator of how cheap silver is today. There aren’t many assets that fit that bill, no surprise given we are living in an era that is becoming known as “The Everything Bubble”.

Who Cares about Bitcoin?

It has been almost a year since we published “Bitcoin, Dollars, Gold: What is the Future of the Money”, which can be accessed here.

In that time, we’ve seen the price of Bitcoin soar to USD $20,000 per coin (it was around $7,000 at the time of publishing), before crashing back to USD $6,000 per coin, with most other cryptocurrencies losing over 85% of their value since the start of the year.

Critics of not only Bitcoin, but blockchain technology as a whole, grow louder by the day, led by Nouriel Roubini, who, in this article published in Project Syndicate, labelled blockchain “the most overhyped – and least useful – technology in human history”.

It isn’t just Nouriel either, with Australia’s Digital Transformation Agency (DTA) also amongst the skeptics. Despite acknowledging the potential in distributed ledger technologies, the DTAs chief digital officer Peter Alexander recently told an Australian senate hearing that “for every use of blockchain you would consider today, there is a better technology”.

Hardly a ringing endorsement.

Most interesting though was a recent Bloomberg article (the title of which is included below), about Bitcoin futures.

Anybody Want Bitcoin Futures? Anybody?

Despite the hype that accommodated their launch, with Bitcoin bulls proclaiming that the launch of the futures contracts would bring institutional investors and their waves of money into the asset class, Bitcoin futures remain a tiny market with little interest.

The CME sees trade of about 5,000 Bitcoin futures contracts a day, barely worth noticing given the 18 million contracts of daily volume in futures contracts for things like oil and gold.

There are a handful of factors holding back the demand for Bitcoin futures, which include:

• Tiny size of market: Despite the hype around Bitcoin and crypto, it's a market that's only $200bn in size. There are individual companies worth more than that. It’s hardly ready for widescale adoption by institutional investors.

• Margin: Bitcoin futures require margin of approximately 40%, versus just 4% for S&P500 futures. That's a lot of capital to tie up.

• No industrial demand: Unlike gold, oil, wheat, etc. – there are no actual business users who need to use futures contracts to hedge risk, etc.

Finally, given the price decline in Bitcoin and other cryptocurrencies, there is a clear lack of speculative interest these days as well, witnessed not only in the absence of volume in futures markets, but also the circa 80-90% decline in volumes on crypto exchanges.

Australian House Prices to Fall Faster?

The fall in Australian house prices shows no sign of abating, with weekly price falls being witnessed up and down the East Coast.
For home owners and investors, the news is likely to get worse before it gets better, with already weak auction clearance rates falling further (see chart below), suggesting the downturn may be about to accelerate.
 

Compounding the problem of multi year lows in the auction clearance rate is the huge uptick in properties that are set to be sold this weekend.

Across Australia’s capital cities, some 2,800 properties set to be auctioned this weekend, a 30% increase on the week before.

This is unlikely to bode well for prices, especially given how much longer it’s taking for properties to actually sell in the current market environment.

The Grey Wolf

We wanted to end this market update with a link to a wonderful presentation from Grant Williams, publisher of the well known financial newsletter, ‘Things that Make you Go Hmmm’.

On October the 1st, Grant delivered a wonderful talk looking at the current state of international monetary affairs, and the chaos we’ve descended into in the absence of a hard money standard.

If you can find 45 minutes, we’d recommend you watch this. The analogy with the grey wolf, and Yellowstone national park is top class.

Until next time,

Jordan Eliseo
Chief Economist
ABC Bullion

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.