Calendar year 2016 has had a volatile start for investors in financial markets, with equities the world over under significant stress. Fears regarding a slow-down and potential hard landing in China, as well as broader concerns about tepid global growth, as well as rising geopolitical tensions in the Middle East and Korea have seen hundreds of billions in ‘wealth’ wiped out.

No region has escaped the rout, with the pain felt in Shanghai, London, New York and Sydney too, with the ASX falling below 4,900 points earlier this week, in what has proved to be the worst start for equity markets on record.

Fortunately, those of us with investments in precious metals have been sheltered from this storm, with the price of gold rising back above USD $1100 an ounce at point, though some profit taking and some commodity index rebalancing has since seen the price of the yellow metal ease back toward USD $1,080.

Silver has held its ground, currently sitting just below USD $14.00 an ounce, whilst prices in Australian dollars for both metals have surged, with the weakness in the local currency pushing gold and silver toward AUD $1550 and AUD $20 an ounce respectively.

Demand for physical metal has been robust over the holiday period, especially at the retail level, with US Mint silver coin sales apparently quadrupling. With a gold/silver ratio near 80:1, we were happy to personally take part in that buying activity, and topped up our own SMSF with some silver over the holiday period.

We’ve noted many of our clients have also done so over the past few weeks, with gold and silver sales off to a solid start to the year, evidence of the robust demand that exists for precious metals today.

Was it worth it?

That’s the question we think a lot of investors will be asking as they wrap Xmas presents this year. The hours spent reading blogs and research and balance sheets and company announcements, all trying to work out which asset class to invest in, which ones to avoid, or which sectors of the market to focus their capital in.

In truth, whether we look at Australian equities, at gold, at the bond market, or global stock exchanges, 2015 is not one most investors (unless they’re been great stock pickers or market timers) will look back at fondly, with quite a few swings in asset markets, but few that have appreciated meaningfully.

What follows below is a review of 2015, not so much looking at asset market returns themselves, but what some of the major drivers have been, as well as commenting on a few things that have caught the eye in the last 12 months, both in Australia and overseas.

We will also share some our favourite charts for the year.

Obviously we’ll also take a look at the precious metal market, summarising our thoughts on its current state based on the developments we’ve seen not only in the past year, but since the cyclical peak in gold back in 2011.

Gold prices have eased this week, with the price of the yellow metal now trading at USD $1,053 an ounce, down nearly 2% from last Friday’s London PM Fix. Silver has also eased too, with the precious metal complex digesting the highly anticipated Federal Reserve monetary policy decision, which saw the US central bank raise interest rates for the first time in nearly a decade.

In Australian dollars, gold and silver are trading just below $1480 and $19.50 an ounce respectively.

The uptick in interest rates, which was largely priced in by the markets by the time it arrived, didn’t perhaps have the initial reaction many were expecting, with equities, gold and even some commodity currencies rising directly after the Fed handed down their long awaited decision.

Much of this has been reversed in the past 24 hours, with gold and stocks weakening, whilst the USD has rallied. The swings in the market are seen nearly in the chart below, which shows the last 3 days gold trading, broken down into specific 24 hour trading windows.

Precious metal markets have traded in a relatively narrow range this week, with market participants waiting patiently on the impending Federal Reserve interest rate decision, which will be handed down next week in the United States.

Gold and silver are currently trading at USD $1,072.90 and USD $14.24 an ounce respectively, more or less unchanged from the previous Friday. In Australian dollar terms, the metals are still on sale, below AUD $1500 and AUD $20 an ounce respectively, areas that have proved good buying over the last year or so.

In this week’s market update, we are going to look at the technical outlook for the gold market right now, as well as the latest futures market positioning. We will also cover some of the main reasons to own gold, including the embedded “option value” in gold, should it be remonetized at some point in the coming years.

Gold prices rallied overnight, erasing some of the losses from earlier in the week, which had at one point pushed the yellow metal below USD $1,050 an ounce. Silver, which at one point dropped below USD $14.00 an ounce has also staged a mini-comeback.

It’s been another soft week for precious metals, with the price of gold trading just above USD $1072oz, down USD $10oz on last Friday’s London PM Fix. Silver has fared slightly better, essentially flat over the week.

Local investors have had a tougher time of it, with the Australian dollar climbing above 72 US cents, and pushing the AUD gold price back below $1500 an ounce. Silver has also pulled back in local currency terms, with the spot price back below $20 an ounce.

The strength in the Australian dollar has been unexpected, especially in light of the ongoing carnage in commodity markets, with iron ore, copper and the like all under continued pressure. Indeed commodity indexes continue to hit new lows, whilst the recently released private capital expenditure survey for Australia showed a 9% drop in the last quarter, and a 20% drop year on year.

Note this is with a car manufacturing industry set to close, housing construction set to peak, and a significant unwind in mining related investment yet to fully play out.

Bottom line, this recent rally in the AUD will prove ephemeral, and we are using it as an opportunity, and adding to our own metal holdings recently.

After starting the week on the back foot, precious metals prices have staged a minor recovery, with gold currently trading at USD $1082 an ounce, unchanged from last Friday.

Silver has also treaded water this week, currently trading at USD $14.40 an ounce, after a three week period that saw the metal lose 10% of its value in USD terms.

In Australian dollars, both metals are still sitting above key levels, with gold sitting at AUD $1505 an ounce, whilst silver is sitting just above AUD $20 an ounce.

The stabilisation in the market was to be expected, after the relentless downward pressure that the precious metal sector has been facing in the past few weeks, which have seen the metals trade at their lows for calendar year 2015.

The stabilisation in the market was to be expected, after the relentless downward pressure that the precious metal sector has been facing in the past few weeks, which have seen the metals trade at their lows for calendar year 2015.

We think the market is potentially due for a bounce over the next week or so, and wouldn’t be surprised to see gold trade back toward USD $1100 an ounce, though whether it’s the start of a imminent and meaningful move higher remains to be seen.

It’s been another tough week for precious metal investors, with gold in both USD and AUD easing further. The catalyst was last Friday’s non-farm payroll report, which smashed expectations, and further increased the likelihood of an interest rate hike by the Federal Reserve in December.

Gold in USD is currently trading at USD $1,084oz, whilst silver is sitting at USD $14.42oz. Silver has shed close to 10% since late October, when it was trading above USD $16oz.

In Australian dollars, it has been a challenging week for metals investors too. After falling toward USD $0.70 late last week, the local currency has picked up, with yesterday’s unbelievable (literally unbelievable) jobs report in Australia ending any hope of a pre-Xmas rate cut in Australia.

AUD Gold is currently sitting at $1521oz, whilst silver is still holding just above $20oz, an area that proved good buying in May, August and September of this year.

Gold and silver prices have been in free fall this week, as increased odds of an interest rate hike by the Federal Reserve next month have battered sentiment toward precious metals.

At present, gold is trading at USD $1106 an ounce, down USD $80 per ounce, or some 7% from the highs it had reached in later October 2015. Silver has suffered a similar fall in USD terms, currently trading at USD $15 an ounce.

Local investors have not been spared this week either, with gold in AUD easing the better part of AUD $100oz, with the AUD still holding above USD $0.70.

The Reserve Bank decision to hold interest rates helped support the local currency, though most forecasters still see further downside in the cash rate over the next few months.

And part of the reason for that is the RBA still seem far too optimistic regarding the outlook for the local economy, with their latest statement of monetary policy predicting a stabilisation in our terms of trade, and growth heading back towards 4% by the end of 2017

With the mining capex boom not even half way through unwinding, residential housing construction slowing, a complete dearth of business investment in the country, negative real wage growth, and declining growth in immigration, this is never going to happen, unless the government turns on the stimulus tap in a way that would have made even the previous Labor government blush.

Further rate cuts should nudge the AUD lower, which will help boost local precious metal prices.

It’s been a volatile week for precious metal investors, with gold and silver prices easing after the Federal Reserve meeting. The sector had started the week on a more positive note, with gold pushing up toward USD $1180oz, and silver pushing above USD $16oz.

The release of the Fed monetary policy statement changed all that, with gold dropping sharply in the aftermath, and easing ever since. At present, gold is trading at USD $1146oz, whilst silver has fallen to USD $15.61oz.

AUD investors have fared better this week, with the local currency weakening off the back of a low inflation print and increased bets of a Melbourne Cup day rate cut (more on this below).

The AUD has dropped from USD $0.7264 to just USD $0.7080 over the past few trading days, helping support AUD gold prices, which are still trading around $1620oz, whilst silver is sitting at $22.20oz, largely unchanged on the week.

Turning back to the Fed, and in a surprise to markets, their latest statement on monetary policy was widely perceived as hawkish, lifting the chances of a December rate hike.

The full statement, for those interested, can be read here, with the market particularly focused on the statements around household spending and business fixed investment, whilst the lack of reference to global instability was also seen as a hawkish turn.

Precious metal prices have had an uneventful week, easing USD $10 per ounce, whilst in Australian dollars, we’ve seen the market consolidate just above AUD $1600 per ounce. Silver has also had a relatively uneventful trading week, currently sitting just below USD $16, and above AUD $22 per ounce.

The consolidation in precious metal prices was hardly unexpected, after a solid 2 month rally that had seen gold rally by USD $100oz, and even more impressive moves in silver.

Despite the increasing likelihood that the worst is behind us for USD Gold, the market as a whole is still a long way away from being ‘optimistic’ about future prices. Evidence of this was seen at this weeks LBMA conference held in Vienna, where the average gold price prediction for next year was just USD $1159.80 an ounce, more or less unchanged from where we are today.

Indeed pockets of extreme pessimism remain, with some forecasters still discussing USD $800oz gold prices.

This is of course a good sign from a contrarian perspective, as too much optimism typically leads to falling, not rising prices. We are quite certain that when gold is one day a bubble, we won’t be seeing timid or even negative price outlooks for the yellow metal.

For local investors, the outlook for the AUD is the most relevant factor to consider short term, which we’ll look at in this short technical piece below.

Precious metal prices have continued their rally this week, with gold rising from USD $1151oz to USD $1182oz, up 2.5% since last Friday. Silver has also rallied, rising just over 1%, to USD $16.24oz.

We’ve also seen a rally in AUD prices, with the yellow metal now comfortably back above $1600oz. Note this is despite the local currency trading back above USD $0.73, a move we expect to be short-lived

Back to gold, and the rally over the past couple of months (the London PM Fix on the 22nd July was USD $1,088oz), has of course had many drivers, not least of which was the Fed decision not to hike interest rates in September.

With US data almost overwhelmingly poor over the last few weeks, it is clear that the Fed has now missed its window to hike interest rates in 2015. Further evidence of this was seen at least a couple of times this week, with;

• The Philadelphia Fed manufacturing index falling 4.5 points. New orders, workweek, inventories all fell noticeably

• Retail sales (ex autos), falling 0.3% for the month, far worse than forecast

Indeed so poor has data been of late that the market is starting to doubt that we’ll even see a rate hike by Q1 of 2016.

Unsurprisingly, this has scared a lot of gold shorts out of the market, whilst the more constructive technical outlook (more on this below), is encouraging a few more longs into the game. And whilst we wouldn’t be surprised to see gold spend a few days consolidating recent gains, a strong finish to 2015, with gold finishing the year above USD $1200oz is looking possible.

For Australian dollars investors, the news could be even better. The main reason we say that is that we expect the RBA to cut rates at least once more this year, or at least market expectations of that cut to strengthen. With that in mind, a weakening of the currency between now and Christmas is likely.

Should this happen, returns for local investors will be magnified. As we stated earlier, the AUD has rallied back above USD $0.73, up some 6% from its mid September 2015 low.

Were the AUD to fall back below USD $0.70 by the end of the year, then we could easily see the AUD gold price start 2016 above $1700 an ounce.

That would be a return for calendar year 2015 of some 20%, which will have gold comfortably outperforming stocks, bonds, cash and even Sydney property for the year, should things stay as they are for the next two months.

With that, we’ll take a quick look at the technical picture for the gold market.

Technical Outlook

with John Feeney

In last weeks market update we spoke of the tightening trading range for gold and the possible breakout if we could see a close above the $1,160 level. This has indeed happened, and gold quickly rallied back above the $1,180 US level in a few days. The $1,180 level is an import one for US gold as it was the absolute bottom for 2013 and 2014.

The recent rally which can be seen below may be due a small pullback as we have the RSI almost overbought and William % signalling short-term overbought. But we feel this move has a lot of momentum, as faith in the Federal Reserves economic prowess is slowly diminishing.

A pull back from this level (USD$10-$20 an ounce) could pose a buying opportunity.

We have further confirmation of a shift in sentiment with the gold miners index rallying hard during October, and the relative outperformance of silver over this period too. The breakout and close above $1,180 can be seen below and is about as positive a start to October that one could wish for.

The chart above is supportive of those who argue that the August low for gold was a meaningful long-term bottom.

Of course back in August, most market participants were still expecting a rate rise, whilst the US stock market (S&P 500) was at 2100. Hedge Funds were also net-short gold for the first time, whilst the mainstream financial press was incredibly bearish gold.

From a contrarian perspective, the sentiment toward gold in August was about as bad as it gets, something we commented on in this piece (published 7th August), where we pointed out that “Sentiment, and the current positioning in the precious metals market is truly awful. It is a wonderful opportunity."

Inflation – it’s here all right.

The other piece of ‘market news’ overnight was the release of the latest US inflation data. Ex food and energy, the number came in at 1.9% for the year, whilst the number including food and energy registered 0.00%, a result of the huge fall in commodity prices over the past year or so.

Low official inflation is something that “haunts” the developed world right now, as low wages growth, excessive debt levels and a more prudent consumer all contribute to slower rates of growth.

Of course, low official inflation only encourages the high priests of neo-keynesian economics push for ‘more stimulus’, which inevitably means more money printing, and the accumulation of even higher levels of debt.

With no inflation to worry about, they see no harm in this policy, arguing it will encourage spending, levitate asset prices and create a ‘trickle down’ wealth effect.

But is there really no inflation? We aren’t so sure, and wanted to share a few observations on this phenomenon.

One place to look in the United States is healthcare, where we’ve seen quite colossal price inflation in the past 15 years. According to a recently published article by Mauldin economics, the total premium for family coverage for healthcare just topped $17,500.

That is up from $5,700 at the turn of the century, an annualised inflation rate of 7.70%

Lets stay in the US, but move from healthcare to the stock market. Wall Street, and the legion of brokers, analysts, asset consultants and fund managers who profit from it have of course celebrate the bull market in stocks we’ve seen since early 2009. And they’ve had much to celebrate too, with the S&P 500 rising from under 700, to over 2000 points.

But what has it cost?

Well, if we look at the cyclically adjusted price earnings ratio for the S&P500, we can see that it has risen from roughly 15 to over 25.50 since early 2009.

Put another way, the cost of buying a share in the earnings of the companies that make up the S&P500 has risen by 70% in the past six and a half years, which represents annual inflation of around 10%.

Hardly benign!

In Australia, whilst many in the market celebrate our soaring housing market, mortgage holders are faced with no choice but to go ever deeper into debt, in order to secure a piece of the Australian dream.

An article in the Sydney Morning Herald from early October 2015 highlighted that the average NSW mortgage for owner occupiers had risen by $78,100 in just 1 year. That is about equivalent to the full time wage of an average Australian, and represents a rise of 22% in JUST ONE YEAR.

If that isn’t high inflation then I have no idea what is.

Finally, consider the amount of money one needs to have accrued in their working life, in order to afford a comfortable retirement, without depleting their capital.

According to ASFA, a couple needs $58,784 in income per annum, in order to live what they define as a comfortable lifestyle. Let us round that up to $60,000 for simplicities sake.

The question is, how much capital must one have in order to earn this income in any given year.

Assuming a diversified portfolio can be expected to earn an income equivalent to the RBA cash rate plus 1%, then we can safely state that

• Pre GFC, when the RBA cash rate was 7.25% (ergo an 8.25% income on assets), a couple would need to have accumulated capital of just over $725,000 in order to generate an income of $60,000 a year

• By Q3 2015, the same couple will need to have accumulated capital of exactly $2,000,000 in order to generate an income of $60,000 a year (assuming a 3% rate of income on assets invested)

That increase, from $725k to $2m represents an annual inflation of over 15% in the past six years in terms of capital accumulation required to preserve a comfortable retirement.

The bottom line to this is that prices, whether we look at healthcare, housing or holding financial assets, are rising, and the economic path we are heading down is a dangerous one.

For those who want a final read, and a different take on inflation, we recommend this piece by Chris Joye from the AFR, which is well worth the time.

So is the Gold Bear Over?

The strength in precious metals over the past few weeks has many asking if the cyclical bear market in gold and silver is now finally over. Pater Tenebrarum, an analyst I have the highest respect for seems to think so, stating in this worthy read that he thinks that “a significant low has finally been put in”.

Whilst we share Pater’s confidence in the long term direction of this market, and are highly encouraged by the recent price action, it does pay to mention that we’ve seen a number of counter-rallies in gold over the past couple of years, none of which have endured.

As such, dollar cost averaging still seems an appropriate strategy for long-term investors.

In Australian dollars, we are still more than comfortable with our position that the worst of this cyclical correction is over, and we have personally been adding to our own positions for the entirety of 2015.

I remain confident precious metals will be the best performing liquid asset class between now and the end of this decade, and certainly the most important one to physically own, but patience is a virtue, or so they say!

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.

It’s been a profitable start to the month for precious metal investors, for USD buyers at least.

After closing out Q3 2015 around USD $1114oz, gold rallied hard on October the 2nd, with a shocking US non-farm payroll report all but ruling out any chance of a Federal Reserve rate hike in 2015.

Silver also liked the news, and has put on approximately USD $1oz, or over 6.4% for the week.

In this market update, we’ll look at the latest economic data out of the United States in more detail, as well as look at the technical picture for the precious metal market.

We will also look at the Gold/Silver ratio, and finish with a look at central bank gold activity.

Precious metal prices eased this week, as market participants breathe a sigh of relief at the end of what has been a truly forgettable Q3 2015. Stating the week out closer to USD $1150oz, gold has fallen some 3%, though its still sitting above USD $1110oz, whilst silver is off just over 2% over the same time period.

In Australian dollars, physical gold can now be picked up for just under $1600oz, whilst silver is sitting just below $21oz.

There is of course the potential for some more volatility in the next 24 hours, with the much awaited non-farm payroll report due out in the United States. We’ll buy on weakness if the metals dip any further.

This weeks report looks at a number of developments over the past seven days. These include;

• The huge sell off in stocks in Q3 2015

• An update on the Indian Gold Monetisation Scheme

• Central Bank buying of Gold – and Australian Dollars

• Gold in SMSF Portfolios

We will also take a quick look at the drumbeats for more QE, which grow ever louder.

It’s now just over a week since the Federal Reserve decided not to raise interest rates. In that time, precious metals have been one of the few asset classes that have responded well to the news, with the price of gold now trading back at USD $1150oz.

In Australian dollars, the news is even better for investors, with the AUD price of gold heading toward AUD $1650oz, up close to 5% for the week. Silver has responded well too, and has climbed back above USD $15oz, whilst in AUD its approaching $22oz, with a noticeable increase in physical demand for gold’s ‘poor cousin’ over the past few weeks.

Whilst it’s been a good week or so for precious metals, the news has not been so good in equity land, with the Dow Jones off close to 1% over the last 5 days. The Dow, which had traded above 18,000 points in mid July, is now off over 10% in the past two months, with that extra volatility in adding some upward momentum to gold prices.

It hasn’t just been overseas stock markets that have struggled in the aftermath of the Fed’s very dovish non-hike. The ASX has also been under pressure, closing below 5,000 points at one point earlier this week, though it’s since clawed back above that level.

Looking back at the gold market and it’s clear that some short covering in the futures market has been at least partially responsible for the uptick in prices this week, as the declining chances of a US rate hike this year (no matter what Janet Yellen said in her just completed speech), no doubt scaring a few of those who’d bet on falling gold prices between now and the end of the year.

We’ve also seen more evidence of robust demand for physical gold, with Chinese gold imports from Hong Kong hitting a 3 month high in August.

The USD $1150oz mark will no doubt prove a crucial area for gold in the coming days. And with that, lets take a look at the technical picture

Precious metals prices moved higher overnight, as the much awaited September Federal Reserve meeting came to a close, with no rate hike announced. Gold, which had been trading back around USD $1100oz at the start of the week, jumped back above USD $1130oz, whilst silver was also up, last trading around USD $15.27oz.

In Australian dollars, gold headed back above $1550oz, last trading at $1576oz, whilst silver is now back above AUD $21oz.

Starting with the Fed, and in news that surprised no one who follows the precious metal market, or even the broader economic and financial landscape with open eyes for that matter, Janet Yellen and her team decided to hold fire on any potential interest rate increase.

Not only have stocks, bonds, commodity and currency markets been more volatile of late, but economic data the world over, and even in the United States, has been underwhelming at best.

In the last few days alone in the United States, we’ve seen;

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.

It’s been another solid week for local precious metal investors, with the price of gold currently sitting north of AUD $1600oz, whilst silver is trading above AUD $21oz. Further weakness in the local currency, which at point earlier this week traded below USD $0.70 has been the major driver, with gold in USD essentially unchanged over the past 5 days.

Gold’s performance in AUD, and the role precious metals more generally have played protecting the wealth of Australian investors this year should not be understated, especially in light of what has again been a volatile trading week on the local stock market.

The ASX is again flirting with the 5,000 point marker, some 1,000 points lower than where many market forecasters predicted it would be by end 2015. Relative to the ASX, Gold in AUD has outperformed by nearly 20% YTD, no doubt one of the reasons that volumes for the yellow metal, as well as silver, have surged noticeably.

Volatility was not confined to the Australian stock market either, with oil prices jumping from below USD $40 to nearly USD $50 in just a few days, as the chart below highlights.

The volatility we’ve seen in financial markets this week is but the latest skirmish in an ongoing battle that dates back to the beginning of the GFC, and indeed the multi decade credit binge that led to it.

The market crash that we saw back in 2007 and 2008 was a natural response to the investment world sobering up (temporarily at least) and realising that there is a limit to all asset bubbles and indeed to economic expansion themselves, especially when they rely on the perpetual expansion of credit. The flight from overvalued risk assets was hardly unexpected.

The recovery in asset markets that we have seen since early 2009 has also been quite natural, as trillions in QE and over 600 interest rate cuts have pushed investors into risk assets, even though economic growth remains weak, debt levels are higher than they were pre GFC, and company earnings have been goosed up by financial engineering.

And so we come to Q3 2015, a time where market historians will note a handful of important forces are at play.

• The worlds second largest economy, and most important contributor to global growth over the past 15, and especially last 5 years, China, is experiencing significant growing pains.

• At the same time, the central bank of the largest economy in the world, the United States Federal Reserve, threatens (and that really does seem to be the appropriate word) to increase interest rates for the first time almost a decade.

• Meanwhile, commodity prices, despite the extraordinary growth in emerging market economies in the past 15 years, have plunged, with the Bloomberg Commodity index of 22 raw materials this week closing at it’s lowest level since August 1999.

• Finally, despite the greatest credit binge in history, and the mathematical impossibility that developed market sovereigns will be able to honour their debts in dollars, euros, yen or pound sterling, sovereign borrowing costs are at their lowest level in 5000 years, dating all the way back to the Babylonian Empire.

That is the field of battle that we are all on, and once one recognises it, increases in volatility, and the wild swings in risk assets we’ve seen the past 5 days can hardly be seen as a surprise.

But what should investors do? How do they win this war that is raging between the real economy and financial markets, and ensure they can protect, and hopefully grow their own wealth in the period ahead.

In an article dealing with the tragic death of Adelaide Football Club coach Phil Walsh earlier this year, journalist Mark Robinson reported on a conversation Walsh had with an SAS leader during Walsh’s time at the West Coast Eagles.

According to Walsh, the SAS leader commented that only three things determine a battle, which were

• Field Position

• Fire Power

• Morale of the Troops

The article went on to comment that the morale of the troops was really the only thing that was in the control of the SAS leader, and indeed a football coach, so he saw great merit in spending a lot of time focusing on that factor.

I was re-reading that article overnight and thought those comments were highly relevant to investors today, and how they should be thinking about their portfolios.

For ultimately, there are three primary factors that will determine returns in the coming years, which are;

• Global economic conditions

• Global monetary settings

• Valuations, and the price investors are paying to own financial assets

And if we draw a line between the SAS leaders comments and financial markets, we can see that global economic conditions and global monetary settings are much like the field position and the firepower.

They are outside of our control!

We can have a view that the global economy will improve in the coming years, or that it won’t, but we don’t really know, and whilst we all play our own little role in it, none of us is big enough to drive the good ship GDP in any particular direction.

Similarly, we can take a view on where interest rates and monetary policy will head, but again we can’t really know. Perhaps it will tighten, but then again, perhaps we will remain in a world of ZIRP and real NIRP, with QE on top for years to come.

And perhaps those monetary settings will continue to exert their somewhat benign influence on the real economy, through eased borrowing costs and minimal official inflation, whilst continuing to support asset prices.

But it is also possible that in the coming years, as in every other occasion in history where such desperate monetary policy measures have been undertaken, unintended and largely negative consequences of QE and ZIRP will rear their ugly head.

Richard Fisher’s warning that _"Inflation is a sinister beast that, if uncaged, devours savings, erodes consumer’s purchasing power, decimates returns on capital, undermines the reliability of financial accounting, distracts the attention of corporate management, undercuts employment growth and real wages, and debases the currenc_y”, is something all investors should be aware of, even if the threat is not on the immediate horizon.

Again, when it comes to where monetary settings will head, and what their impact will be on the economy, none of us can be truly sure.

Instead, much like a SAS leader or a footy coach can only fully be in control of the morale of their troops, the only thing we as investors can control is the price we are willing to pay for the assets we buy.

Are we comfortable buying developed market sovereign debt at negative real yields, when they’ve been in a bull market for over 30 years?

Are we comfortable buying Australian property when it too has been in a bull market for the better part of three decades, with prices at all time highs, and rental yields at all time lows.

Are we comfortable buying international shares, which if we use Shiller CAPE as a guide, are already trading at 25 times earnings, fully 50% above the long term average and at a historical entry point that suggest a high risk of significant losses in the decade ahead?

How investors approach this battlefield in the years ahead is a personal decision, but I for one will not concentrate too much of my own, or my families money in financial markets today.

The valuation that I would need to pay, which is the only thing I can truly control, is simply not attractive enough, and warrants a more cautious approach.

And whilst none of us can know with 100% certainty what will happen in the economy in the years ahead, and what the impact of the extraordinary monetary largesse we see being deployed around the world will be, we will not ignore economics, or history, to paraphrase Ray Dalio.

As such, we will continue to keep a portion of our wealth in physical gold and silver.

As Bill Bonner once commented. Gold may go up. Gold go may go down. But gold will not go away

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.

It’s been a week to remember for global financial markets, with equities and bonds the world over experiencing wild gyrations in value, and volatility spiking.

The precious metal sector has been caught up in the excitement, with gold pushing higher early in the week, reclaiming USD $1150oz for a time, only to ease back in the last 72 hours, as equity markets turned higher.

Silver has had a tougher time, caught up in the broad commodity carnage, and has fallen roughly 5% for the week in USD terms, though it is still above AUD $20oz.

Amazingly, this recent price action has pushed the Gold/Silver ratio to an incredible 77:1, though at one point earlier in the week it was nearly 80:1

As you can see from the chart below, relative to gold, silver is as cheap now as it was back when the GFC hit.

It’s been another very solid week for precious metal investors, with the AUD price of gold closing in on $1600oz. In USD terms, the price has now rallied 4% for the week, and is comfortably back above $1150oz

Year to date this means that the price of AUD gold is up $150oz, or approximately 10%, which is about the annual average return for the precious metal in the last 15 years.

Just how good (though not spectacular) a return that is comes to light even more when we consider that the local stock market is now in the red for the year, frustrating investors who have felt ‘forced’ into it as a result of the 50bps of interest rate cuts the RBA has inflicted on them.

As for what has caused the rally this week, we see three primary forces at play which are responsible for the move in gold. Not only are we seeing some serious volatility in the equity market, with the S&P off sharply overnight, but we’ve also see the USD weaken in the past 48 hours, with expectations of a rate hike in September falling. We discuss both of those in more detail later in this piece. Finally, we’ve seen some short covering in the market, which was not unexpected considering how stretched it had become.

The gold rally over the last week is also no major surprise when you consider what the charts were looking like in early August. Gold was bouncing around the USD $1,080oz mark, and most market commentators and mainstream media (Bloomberg, CNBC, etc) we’re producing ever more bearish headlines and ‘analysis’, predicting prices to go lower.

We at ABC Bullion did blog about the sell-off and the expected rebound in price, which you can find here:

Gold prices have risen 2% this week, climbing back above USD $1100oz, as China surprised markets with three consecutive devaluations of the yuan, in an attempt to stimulate their slowing economy.

The upward move in gold was exceeded in the silver market, which is up over 5% for the week in USD terms, currently trading just below USD $15.50oz.

The AUD is effectively unchanged for the week, trading at USD $0.7368, meaning precious metal price moves in the local currency have been similar to that experienced in USD.

The AUD gold price is currently sitting at $1513oz, now up nearly 5% for the year.

The upwards movement in precious metal prices this week was not unexpected, with the market looking due for a bounce, something we hinted at last week when we discussed sentiment and investor positioning in the precious metal complex.

It’s been another quiet week in the precious metals market, with the price of gold trading in a relatively narrow range between USD $1,080oz and USD $1,095oz, with participants focused on the upcoming non-farm payrolls report from the United States, which will be released tonight Sydney time.

Silver has also been in a roughly US $0.40 cent trading range, between USD $14.40 and USD $14.80, up a couple of per cent for the week based on last Fridays London Fix price.

And whilst the market has been focusing on the upcoming employment numbers due out tonight, there has been no shortage of economic data out for the week already.

In the United Kingdom, we’ve seen the Bank of England “dove up”, with the BoE stating that “The near-term outlook for inflation is muted and the falls in energy prices over the past few months will continue to bear down on inflation at least until the middle of next year.” They went on to say that; “Given the likely persistence of the headwinds facing the economy the MPC expects Bank Rate increases, when they come, to be gradual, and to be limited to a level below past averages.”

The continued dovishness by the BoE, plus existing QE programmes in place in both Japan and Europe are already putting upward pressure on the US Dollar, and will make it increasingly difficult for the Fed to raise rates meaningfully, although the market is increasingly looking toward a September lift off.

We aren’t convinced that will end up happening, as economic data out of the United States continues to underwhelm. Apart from a solid ISM non-manufacturing PMI result, the majority of data out this week from the United States this week was poor.

The ISM manufacturing PMI report came it at just 52.7, a contraction from last month and signifying exceptionally modest expansion, whilst construction spending month on month rose just 0.1%, well short of expectations.

The ADP private sector employment report also grew by just 185,000 jobs, well short of expectations, whilst we also saw a blow out in the US trade balance, which came in at -$43.8 billion in June 2015, up from -$40.9 billion in May.

No point better illustrates the still tepid nature of global growth, and the danger that the much stronger dollar already posses than a sub point from the news release highlighting the latest trade deficit figures which highlighted that;

After the violent sell off that took place at the start of last week, it hasn’t been surprising to see the precious metals sector consolidate, with bullion prices essentially unchanged over the past five trading days.

The gold market is currently sitting at USD $1,085oz for gold, whilst silver is still trading below USD $15oz, with the market for both metals set to pull back 7.3% and 5.5% in USD terms for the month of July.

Australian dollar investors have been protected by the fall in the dollar over the course of July, with metals prices in AUD set to fall 3.25% for gold and just 1.12% for silver this month.

Sentiment towards the market remains incredibly bearish. We are seeing some banks predict a short-term rally in the market, though most think it will prove short lived, with the dominant themes of a USD rally, a Fed interest rate hike and broader commodity price crashes underpinning the lack of buying enthusiasm for the precious metal sector.

The overwhelming bearishness (which we see as a good sign), is best summed up in the chart below, which shows the net position for hedge funds in the gold futures space. As you can see, hedge funds are actually net short gold today, something that hadn’t been seen in over a decade.