Venezuela Trumps Weimar

In news this week the International Monetary Fund (IMF) has warned that the inflation rate in Venezuela could top 1,000,000% by the end of the year, as the country is in the midst of a hyperinflationary episode that trumps the Weimar republic episode post WW1. 
 
We have reached genius level central planning at this point. The latest strategy from President Nicolas Maduro in combating this crippling situation is to ‘remove five zeroes from the ailing bolivar currency rather than the three zeroes originally planned’. 
 
Many locals are forced to survive through a bartering system as faith in the currency has been completely destroyed. An example of what can go wrong in a worst-case scenario of Fiat currency debasement. 
 
Any local Gold investors would have been somewhat protected as Gold in Venezuelan Bolivar’s has increased a modest 1,000,000%+ since the start of 2018.
 
 

 
Source: https://www.goldbroker.com/charts/gold-price/vef
 
It is interesting to note that the described sources of the problem are eerily similar to policies currently adopted by many governments and central banks around the world today. Alejandro Werner, head of the IMF's Western Hemisphere Department, pointed to economic "distortions" in Venezuela's policies, including printing money to finance the government (heard that before perhaps?)
 
"We expect the government to continue to run wide fiscal deficits financed entirely by an expansion in base money, which will continue to fuel an acceleration of inflation as money demand continues to collapse," he said in the statement.
 
One could compare to the current situation in the US with the government essentially funding an ever-increasing debt (of currently $21 trillion) in a similar manner. Main difference of course is the complete lack of faith in Nicolas Maduro VS the apparent trust and belief in Donald Trump.

Gold searching for its feet

It has been a decent sell off in Gold in recent weeks, which continued last week as we try to find a bottom in a falling knife scenario. 
 
Investor focus on Wednesday centered on the meeting between US President Trump and European Commission President Juncker in Washington. Intense interest surrounded the ability of the two leaders to arrest the deteriorating trade relationship between their respective trading blocs, which have come about from President Trump’s use of tariffs as a cudgel in his ‘trade war’ against those nations whom the US Administration perceives as placing the US at an egregious trading disadvantage stemming from the imposition of long-standing trade barriers inimical to US interests.
 
Precious metals held firm above recent lows as US equities rallied and the US Dollar Index weakened after an agreement was reached to expand European imports of U.S. LNG and soybeans and to lower industrial tariffs on both sides. Newswires carried the following comments from President Trump at the post-meeting presser:

• We agreed to work together toward zero tariffs on industrial goods

• EU will increase purchases of U.S. soybeans

• Deal made to strengthen strategic energy cooperation

• Deal for close dialogue on reducing trade bureaucracy

• U.S. & EU to work together to `reform' the World Trade Organisation

• We won't go against spirit of deal while talks ongoing

• We'll resolve steel, aluminum tariff issues

Gold’s retreat to (and continuation below) critical technical support at USD 1236.50 in recent weeks can arguably be partially attributed to seasonal factors (northern hemisphere summer vacation period) with the “sell in May and go away” adage playing out as it also did in 2013, 2014, 2017 and now, 2018 (highlighted on attached chart). 
 

Headline / geopolitical risk notwithstanding, it now remains to be seen whether support between the psychological ‘big figure’ at USD 1200.00 & the 10th July 2017 low at USD 1204.50 can remain undisturbed and provide a springboard for gold to recover (as it has also done in previous years) when the northern hemisphere summer holiday period winds down.  
 
Since the 200 Day moving average at AUD 1692.00 ceded earlier this month, XAU/AUD trekked back to the mid-March low at AUD 1670 and down to the late January lows at AUD 1652.00 as highlighted in previous commentaries. For the moment there is little to confidently suggest that the lows are in place at current levels, with the next level of major technical support emerging at the AUD 1632.00 level - the low seen in mid-December last year.
 
A bounce or rally from here cannot be ruled out, as we remain heavily oversold in both AUD and USD at present. 
 

Danger signs in Equities

An article on Livewire markets this week really highlights where we are sitting in terms of current valuations of equities, and why one must not expect high returns in this space in coming years. More on this here.

One popular measure for valuation is the Shiller Cyclical Adjusted Price Earnings index. Which basically tells us that the US stock market has only ever been more expensive relative to cyclically adjusted earnings, two times in history. One was during the hype of the Dotcom bubble in 2000, and the other being 1929 stock bubble that pre-empted the great depression. 
 
Regardless, equities continued higher last week, but some cracks could be starting to appear. 
 
Facebook shares overnight were trading a whopping 20% lower, after an earnings report obviously came short of expectations, wiping out $132 billion in value. With valuations in the US tech sector at extremes there is a lot of future earnings growth priced in already so this could provide somewhat of a contagion going into next week, so we will keep a close eye on how FAANG stocks react in coming days.
 

The interesting point with US equities at present seems to be the complete lack of concern over tightening monetary policy. The previous years in this bull market had the crowd cheering “don’t fight the fed” as the most experimental easy monetary policy ever adopted was introduced in the way of ZIRP and Quantitative Easing (QE). 
 
Now we have the opposite. Rates are rising and the Fed is currently unwinding its balance sheet in a period of Quantitative Tightening (QT), yet the streets’ appetite for risk is the highest ever, bar two times in history. So anyone who is long US equities is in fact now fighting the fed.
 
Certainly puzzling times to have a central bank reversing the very policy that contributed to the latest expansion, whilst we have Equities such as Apple and Amazon approaching $1 Trillion market caps, many tech stocks trading at Dotcom style valuations, and a car company that burns around $2 Billion in cash per year valued at +$50 billion.

Silver Kruggerand Arrives Next Week!

In new product news, ABC Bullion is proud to have exclusive distribution in Australia for the brand new South African Mint 2018 1oz Silver Krugerrand Coin. 
 
Manufactured from silver with a purity of over 99.9%, the 1oz Silver Bullion Krugerrand Coin will make investing in Krugerrands more accessible to millions around the world.
 
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Until next time,
 
John Feeney & Andre Lewis
ABC Bullion

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