Precious metal prices have eased in the past five trading days, with investors a little skittish ahead of the upcoming Federal Reserve meeting, which is scheduled to take place next week.

The yellow metal has fallen to USD $1,111.95oz, whilst the AUD price has pulled back below $1600oz, currently trading at $1573oz. It has fallen approximately $50oz since the start of the week, offering an opportunity to investors looking to add to positions on this pullback.

We wouldn’t be surprised to see the market tread water for the next few days, with few major catalysts likely to drive prices in the lead up to the afore mentioned Fed meeting.

Personally, we expect the Fed to hold fire, heeding the warning (or is that begging) from the IMF and the World Bank, both of whom have suggested they should hold off any rate hikes for now.

Not only is economic data out of the United States tepid at best, but there is clearly a global economic slowdown taking place, not to mention the additional volatility we’ve seen in financial markets of late.

Corporate profits in the United States are also under pressure, in no small part to the monstrous USD rally we’ve seen in the past year, whilst business investment intentions remain weak.

Nevertheless, any hike, or even the threat of one before the end of the year will likely impact the gold price, though we aren’t at all convinced it will lead to a major sell off, as many are forecasting.

Indeed as we’ve discussed in previous market updates, there have been many periods of time where the Fed has been hiking rates aggressively, and rather than sink, the gold price has instead moved meaningfully higher.

The price action in gold, and what was happening with interest rates between 1971-1974, 1976-1980 and 2001-2007 are great illustrations of the point above, with gold performing incredibly in these periods, alongside tightening by the Fed.

The bigger story this week has again been share market volatility, which markets all over the place. Earlier in the week, the Nikkei rallied by over 7%, a ridiculous move for a developed market economy that speaks volumes about how divorced from economic reality financial markets have become.

We’ve also seen the ASX jump around quite a bit, closing the week out just 5,071 points, perilously close to the 5,000 point mark.

All this reinforces the importance of diversification away from an over reliance on financial markets as a whole, and why holding at least some of your portfolio in physical precious metals makes sense. Personally, I’m treating the recent pullback in gold and silver, and the small rally in the Australian dollar as a buying opportunity, adding to my own holdings this week, and in that I’ve been joined by a huge number of our clients, with retail volumes rising over the last few days.

This is a continuation of what has been a very busy few weeks volume wise, with the sell off in stocks in August no doubt contributing to some safe-haven demand amongst all investors, including many SMSF Trustees.

ABC Bullion in the News

Earlier in the week, we were lucky enough to do a LiveWire Exclusive interview, which we filmed at our sister company, Custodian Vaults. The clip below features part of that interview (other parts will come out over the next few weeks), with the discussion focusing on gold’s relative performance to equities, as well as the role central banks are currently playing in the gold market.

Whilst some of this material will not be news to ABC Bullion subscribers, it’s great to see the more mainstream financial media show more of an interest in the physical bullion story. With financial market volatility and economic instability likely to be with us for many years to come, we expect interest in precious metals to rise, alongside demand, and ultimately, prices.

You can watch the interview by clicking on this link here

Who says gold doesn’t pay interest?

One of the major critiques that we hear ad nauseam arguing against gold investment is the comment that gold doesn’t pay any interest.

We won’t bother to explain our thoughts on the argument again – but it is worth pointing out that the latest developments in India, where the government is launching a gold monetization scheme, where citizens will be able to earn 1.5 to 2% per annum on any gold deposited with the authorized institutions, whilst gold backed bonds could earn interest of some 3% per annum.

You can read more about it here

Bottom line to this: Gold will in fact pay interest.

Now of course these kind of products introduce credit risk to anyone depositing their gold, and that should not be overlooked, but that doesn’t change the fact that this a step towards gold being seen as money again.

Money can be deposited in a bank, and one should earn interest on that money deposited. It’s also worth pointing out that a 2 to 3% per annum income stream puts the yield on gold at about the same level as a regular Australian regular term deposit or 10 year government bond. Not bad for a barbarous relic

As such, whilst we see risk in this kind of development, we also see opportunity, and aren’t quite as pessimistic as the usual suspects are, who are all claiming this is nothing but a conspiracy that will ultimately lead to gold confiscation in India.

Two interesting charts

Before finishing this week, we wanted to share two interesting charts we came across.

The first deal will with bank lending in Europe to non-financial corporates, and the rate of annual change. Obviously, this plunged during the GFC, and has remained incredibly weak – as you can see from the chart below.

It is worth noting though that the pace of bank lending has actually turned positive on a year on year basis now. Now we are not for a minute suggesting that a genuine self-sustaining recovery (i.e. one that doesn’t need QE, ZIRP and budget deficits) in Europe is imminent, but it is interesting as this development could portend a slightly stronger Euro, and weaker USD.

It will no doubt impact gold prices too.

The final chart we wanted to share was this one, which looks at sentiment towards commodities as a whole. As you can see, sentiment is at rock bottom, alongside commodity prices themselves, many of which are trading at their lowest level in over a decade.

And whilst gold and silver are not commodities per se, they are impacted by this, if for no other reason that many market participants see them as commodities, not to mention the fact that commodity prices are also important for inflation readings.

Any contrarian investor, no matter the asset class, should be highly encouraged by a chart like the one below.

When you can buy a market at a point of “peak pessimism”, over the medium to long-term, the only way is up.

Until next week

Disclaimer

This publication is for education purposes only and should not be considered either general of 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, 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.