​‘Zero Has No meaning’

Precious Metals Commentary

We saw some consolidation in precious metals prices this week with gold drifting back below US$1,500 and silver pulling back to $17.00 an ounce. It seems that short-term, the battle for the $1,500 level will come under pressure from profit taking as the price remains well above moving averages and looking short-term overbought.

With some further consolidation warranted, those waiting and hoping for a short-term pullback in precious metals prices might find their entry spot next week, but what could upset the party would be commentary coming out of the Jackson Hole gathering of central bankers which will happen our time tonight. Gold will no doubt react to the tone of the commentary of Fed chair Jerome Powell, so prices hinge on how that plays out tonight.
 

With the AUD/USD hovering around 0.675 US cents, it is relatively flat for the week, which sees gold in AUD terms trade lower to $2,218 and silver trading at $25.29 per ounce. Performance of the Aussie will likely depend on how iron ore holds up after its recent spanking (see chart below), and the difference in commentary between the RBA and The Fed.
 

With Central Banks taking monetary policy further into extremely distorting territory, it pays to be able to get the message across effectively to the broader masses. One central bank with a little creativity has produced the most absurd thing I think we have ever seen when it comes to economic commentary, and that is the Bank of Jamaica’s ad campaign to educate the punters about inflation, using reggae.

Whilst other central banks are struggling to hit their inflation targets Jamaica is sitting above 4% and a little too high, so it seems we need some reggae to calm everybody down and perhaps reduce the velocity of the money supply as a result. ABC News has the full video here.

Perhaps next we will see a music video of Christine Lagarde with salsa shakers to ‘educate’ everybody about how beneficial negative interest rates will be for the global economy.

A Global Case for Gold

On Tuesday we held our National Conference on a Global Case for Gold. The 620 attendees created a real buzz in the room and while we ran over our planned time (which was no fault of our master of ceremonies, Nick Farr-Jones, who kept it moving along smoothly) no one cared given our thought-provoking speakers.

We would like to thank the Deputy Premier, the Hon. John Barilaro, MP, for his kind words and support. Jake Klein’s opening presentation “showed us the money” and was great lead in to James Rickards’ talk on the geopolitical and economic issues driving gold.

Nick Farr-Jones kept our panel on its feet with probing questions to James Rickards, Tom Rachcoff from Cor Capital and our own Nick Frappell.

The next must-attend event will be the Gold and Alternate Investments Conference to be held from October 24 to 26. ABC Bullion is a sponsor and this year in additional to a great line up of speakers and mining company presentations, they have added a digital markets and gold day on Saturday. If the response to our event is any indication (we had over 50 on our waiting list) you should get your early bird tickets (starting from $49) now at goldevent.com.au.

Trapped in the Financial Matrix

Last week, we covered government moves to restrict usage of cash in the economy. Reader Paul responded to our comment that gold “is a highly liquid, easy to get in and out of asset that is outside the financial system” and said that because ABC Bullion does not pay physical cash out when buying back precious metals, investors would remain trapped in the banking system.

We wanted to address this issue publicly because we think it is important that investors understand that holding physical cash does not take you outside the financial system. Our view is that when you exchange gold for cash, you are still “trapped”.

As we noted last week, in late 2008, Australia nearly had a full-blown bank run. Why? Because people were worried that the banks’ assets that backed their electronic deposits were not good. The majority of those assets are mortgages.

So what backs the physical cash you now have in your pocket? Well, that cash is issued by the Reserve Bank of Australia (RBA) which, according to the RBA’s latest balance sheet totals $75,565,000,000. Those financials show that the RBA’s assets are:

Note our cash is only backed by 2.3% gold with the majority of it being “securities”. The eligible securities the RBA can hold include bank bills/debt, certificates of deposit, residential mortgage backed securities, and so on – pretty much the same stuff a bank holds - but don’t worry, those mortgage securities are good as there is no bubble in housing (chart from Westpac).
 

If you don’t want to get trapped in the financial matrix, we still think gold and silver are the best hard assets to hold. It will be easy to exchange it for other stuff you need if you want to stay out of the system.

Talking about having one’s wealth trapped, it seems those in Hong Kong have become very aware of this risk. Bloomberg reported that J. Rotbart & Co. has seen a change in their clients’ preferred vaulting location. In the past, 50% picked Singapore and 35% went with Hong Kong. In the last 10 weeks that has now shifted to 75% for Singapore and 10% for Hong Kong.

Wall Street Journal reports that “some businesses say they are seeing money move abroad” but not all are getting the message about gold; if Sarah Fairhurst is any example, as she converted 200,000 Hong Kong dollars into British pounds, not gold, saying “I don't know what's going to happen, but I know that I don't want my money trapped here”.

Debt Stress

Putting political issues to one side, swapping Hong Kong for the UK may not have changed Ms Fairhurst’s risk, with global consulting firm McKinsey & Co. warning that signs of an Asian crisis rerun are ominous with “firms in most of Asia face ‘significant stress’ in servicing debt obligations” (as indicated by an interest coverage ratio of less than 1.5 times). On this measure, the UK doesn’t look any better than Hong Kong or Australia, for that matter.
 

Continuing with our trapped theme, Digital Finance Analytics noted that more than 300,000 households paying higher mortgage rates “who have attempted to refinance to the much lower attractor rates and are in mortgage stress are being declined” resulting in them being locked into higher rates and are “mortgage prisoners”.

They also say that there are just over 1 million households estimated to be in mortgage stress in July, or 32.1% of borrowing households.
 

Zero Has No Meaning

Last week, former Federal Reserve Chairman Alan Greenspan was reported as saying that zero has no real meaning for the US bond market, by which he meant that he couldn’t see any reason why US interest rates could not go negative like they have in other countries.

Fund manager Kyle Bass said in a CNBC interview that monetary easing around the world was “insane” and would eventually result in US rates to zero.

The situation we are in is certainly historic, with Bank of England research on interest rates concluding that the current bond bull market is the second most intense and second longest in over 700 years.
 

Looking at that chart, it makes sense why the US Treasury was reported as looking at issuing 50-year or 100-year bonds. But if it is an opportunity of a lifetime for the government to lock in record low rates, if you are an investor you have to wonder if such bonds would be a misfortune of a lifetime.

Institutional investors are increasingly wary of being on the other side of this deal, and the run up in gold has been driven by investors looking for an alternative safe haven when the safe haven of bonds is offering negative returns.

An insight into how fund managers are thinking comes from AMP’s dynamic markets fund, which was reported as saying they are long bonds and long gold, even though they considered bond valuations lofty. Their reasoning is that a catalyst for a reversal in bonds is not in place yet but holding gold would provide a hedge when that changes.

David Rosenberg, chief economist with Gluskin Sheff + Associates Inc., says that “gold soaring, bonds rallying sharply, an equity market rolling off the highs, deepening racism, and a tariff and currency war … sounds a lot like the 1930s to me”. His advice – be as liquid as possible and “hold cash, gold, silver, long Treasuries – and limit your equity exposure to noncyclical sectors”.

Physical vs Professional

While we have seen a lot of professional investor interest in gold, with Mark Mobius being the most recent saying that “gold’s long-term prospect is up, up and up”, it would appear that the Mom and Pop investor and wider physical buying is largely absent outside of Australia.

At ABC Bullion, we have been very busy but the latest sales from the US Mint shows a very weak market average monthly Gold American Eagles sales of 5,000 ounces over the past four months. This is in stark contrast to the market from 2008 to 2016, where monthly sales averaged just over 90,000. Silver is not that much better, falling from a monthly average of 3.1 million ounces from 2008 to 2016 to 1.5 million per month in 2019.

We are getting mixed reports from our overseas contacts, with some reporting strong retail investor interest and others seeing a lot more selling back. On top of this, you need to add weak physical demand from India (due to duty increase and high local prices) and China, with China Daily reporting gold bars sales down 17% year-on-year and gold coins down 29% partly due to increasing local prices.

This leads analysts like Rhona O'Connell of INTL FCStone to conclude that gold's summer rally has been driven by professional money saying that, given its leveraged nature, “if we do get $1,600, we probably would have seen $1,470 first”.

In his latest monthly technical report, ABC Bullion Global General Manager Nick Frappell says that price targets suggest US$1,590 and US$1,635 in the medium-term although recent price action suggests consolidation and a short-term risk of lower prices.

Maybe a bit more of CNBC Mad Money's Jim Cramer will get mainstream investors into gold, with him recently saying that “everyone should own 10% of their money in gold, is fine with me”. Given how under-exposed the average investor is to gold right now compared to previous years, if a general adoption of even 10% played out over the next few years, one could expect much higher prices as a result. The current small percentage of investable funds allocated to gold and gold related assets gives us confidence that this secular bull has much further to run long-term.

Until next time,
 
John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.

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.