Market Updates

Whether it’s a golden wedding anniversary we’ve attended, cheering on an Australian to a gold medal performance at the Olympics, or describing a friend or loved one as having a ‘heart of gold’, Gold is a word that we all instinctively recognize and associate with something of merit or value.

And whilst many of us own some gold jewellery, as a pure investment asset, gold is a little harder to understand.

On the downside, it pays no yield, its volatile (like shares) and its impossible to value by any traditional valuation metrics, as it’s not like a business which has sales figures or profit margins you can analyze.

Certainly these are the characteristics that most financial planners and big fund managers focus on, as they find it too difficult to classify as either a ‘growth’ asset, like shares, or a ‘defensive’ asset, like term deposits.

Indeed, despite matching the performance of listed Australian equities over the past decade or so, and comfortably outperforming term deposits and government bonds over the same period, most fund managers still don’t have any allocation to physical gold whatsoever, and instead keep all of their clients money invested in the afore mentioned financial assets.

But gold has a number of fantastic qualities that investors should consider when they’re putting their portfolios together.

It’s nearly 18 months since the gold market witnessed its sharpest falls in three decades, with the price of the yellow metal plummeting from the USD $1600 to USD $1300oz mark in April of 2013.

That correction wasn’t the end of the pain either, with rallies in both May and the July- August period of 2013 both proving short lived, with gold double bottoming below the USD $1200oz mark in both June and December of 2013.

By the end of the year, investors had well and truly had enough of the barbarous relic, and 2014 was almost certainly going to see further price falls.

According to some retail investor surveys at the time, there was literally 0% bullishness towards the sector, whilst there were predictions of further price falls by analysts taking part in the LBMA survey.

Wall Street investment banks, most of whom only turned bullish on gold in 2011 (many were predicting USD $2500oz or higher in 2012) also completely changed their tune, with an ever more bearish stream of predictions coming out in late 2013 and early this year.

But a year or so on from this epic crash, and with gold one of the BEST performing assets of 2014 so far, where is the precious metal market really at?

Lets get a gauge by looking at some of the key areas to watch, including physical flows, the futures market, gold ETFs and global central banks.

Just over a year on from the largest precious metal correction in decades, and in an environment where equity markets appear unstoppable, it might seem futile to explain the benefits of investing in bullion to new investors, including Australia’s ever growing army of SMSF Trustees.

Indeed, many investors who flocked to bullion only a few years ago are re-assessing their investment strategy and deciding whether or not it makes sense to divest their holdings and allocate their investment capital back into the stock market. This is a sentiment that is particularly acute amongst those who were ‘late to the party’ with gold, and who invested near the peak in 2011.

Those investors have seen a significant decrease in the value of their holding, with the gold price falling from circa US $1900oz in September of 2011 to below US $1200oz by June 2013.

Australian dollar gold investors, including the legion of SMSF clients that we already have at ABC Bullion have, have also seen their bullion values decrease, though they’ve been somewhat cushioned from the correction due to the fall in the AUD in the past 12 months.

Either way, despite climbing roughly $100oz in the past year, gold still has much catching up to do.

With that in mind, lets look to the future – how should investors position their portfolios?

According to the latest investment patterns survey from Multiport, a leading SMSF administration service, the breakdown of a typical self directed investor portfolio looks something like this.

On the 8th August 2014, Christopher Joye wrote a typically insightful piece in the AFR, titled “Cash sacrificed on the altar of easy credit”. The article didn’t mince words, nailing the problem caused by the RBA’s ultra stimulative monetary policy in its first sentence, stating; “Deposit products have been murdered as viable investments and conservative savers are being compelled to absorb much more risk than they ordinarily would to meet their income needs.”

The article also included the following chart, which show that, after accounting for inflation (and especially if factoring in taxes), that cash rates are effectively negative in real terms.

Gold prices got their mojo back overnight, moving sharply higher as the situation between the Ukraine and Russia deteriorated, with Russian defence minister, Sergei Shoigu, stating that Russian troops “must be in constant combat readiness”. In response, the US joined NATO and Poland, warning of an ‘incursion risk’ in the area.

The disturbing developments unsurprisingly lent a ‘safe haven’ bid to the yellow metal, which shot up some USD $20oz to USD $1310oz at one point, before edging back a couple of dollars as I wrote this article.

The sharp rally was captured neatly in the following chart, which shows the gold continuous contract, and the price action when the “NATO incursion headlines” hit the wires.

Irrespective of their market of choice, investors the world over got a wake up call overnight that risk does in fact still exist.

In what was the most tumultuous night for markets in many months, with stocks and commodities hit, whilst bond markets held up.

European markets we ugly, with the Euro Stoxx down 1.7%, whilst the French, German and Spanish bourses were down between 1.5 and 2.1%.

The news was no better on the other side of the Atlantic, with the Dow down 1.9%, the S&P500 off 2% and the NASDAQ faring even worse.

Whilst one might have expected gold to find buyers in the face of such a risk off day on equity markets, there was no such luck for the bulls, with gold prices heading as low as USD $1278oz before recovering a few dollars

The yellow metal, which had held up incredibly well earlier in the week in spite of the +4% US Q2 GDP print and the further tapering of QE, is now sitting just below the key 200 day moving average.

The tragic events in the Ukraine, and the ongoing and in many ways escalating conflicts in Israel, Gaza and Iraq were a sad reminder to everyone, investors included, that we live in an often dangerous and unsafe world.

Whilst one hopes we see a swift and peaceful resolution in all of these ‘hot-spots’, it does seem unlikely, with reports overnight that two Ukranian military jets had been shot down, whilst their was talk of a truce between Israel and Hamas, though nothing has been agreed at this point

With that as a backdrop, it’s not surprising that traditional safe haven assets like gold (and US Treasuries) have received a bit more support over the last few days, with gold climbing back above USD $1300oz, and US Treasury 10 year yields falling all the way to 2.47%

Precious metal investors received a rude shock this week with gold, which looked like it was finally ready to re-exert itself, but falling roughly USD $50oz in two trading days.

The precious metal market has enjoyed another steady few days, consolidating gains above the USD $1300oz level for gold, whilst silver is just above the USD $21oz level for now, last trading at USD $21.10oz

It has been relatively uneventful week, with no major developments on the geopolitical front, nor any ‘market moving’ economic news, though there’s been some volatility in equity markets these past few days.

Indeed all eyes seemed to be waiting on the overnight release of the latest Federal Reserve Minutes, though even this has no major surprises, with QE likely to be tapered according to previous guidance.

Whether it’s a golden wedding anniversary we’ve attended, cheering on an Australian to a gold medal performance at the Olympics, or describing a friend or loved one as having a ‘heart of gold’, Gold is a word that we all instinctively recognize and associate with something of merit or value.

And whilst many of us own some gold jewellery, as a pure investment asset, gold is a little harder to understand.

On the downside, it pays no yield, its volatile (like shares) and its impossible to value by any traditional valuation metrics, as it’s not like a business which has sales figures or profit margins you can analyze.

Gold prices have traded in a relatively narrow range again this week, oscillating between roughly USD $1315oz and USD $1335oz, as the market awaits a compelling impetus to push it higher.

ADP employment figures released in the US overnight, which saw 281,000 jobs created acted as a headwind to prices, which traded down toward USD $1320oz upon the release, but in a sign that the market is now in stronger hands, this weakness was short lived, and gold bounced back to roughly USD $1327oz, where it sits today.

Silver has also been steady, trading either side of USD $21oz, as it has for much of the past two weeks, and currently sits at USD $21.18

For Australian dollar investors, the relative strength in the AUD, which was nudging the USD $0.95 cents level at one point this week, and which still sits at USD $0.9436 has helped constrain prices, though we’re now above AUD $1400 and AUD $22.50 for gold and silver respectively.

The precious metal market has consolidated last weeks gains in the past few days, mostly trading in a range between USD $1310oz and USD $1330oz. Silver has also stabilised, trading in a relatively narrow range either side of USD $21oz

Up about 9% for the year, the rebound in gold prices has been pleasing for all, though local investors have been held back a bit with the largely unexpected rally in the AUD.

Whilst the recent strength in the sector has been pleasing, and momentum is with the bulls right now, it bears repeating that it’s still too early to say that we’ve turned a decisive corner, and that “the bottom” is in.

Yesterday (the 18th June 2014), my friend Greg Mckenna, who blogs daily for Business Insider on all things markets and economics, wrote an excellent piece on gold, titled: “TRADING INSIDER: Here’s why Gold Polarises Traders and Divides the Market”.

Gold prices have enjoyed a steady week, up just over $10oz from last Friday’s London PM Fix, and currently sitting at USD $1261oz. Silver is also up marginally, sitting at USD $19.23oz. It’s been a relatively uneventful week for the precious metal complex, and indeed for global economic data, after last weeks ECB interest rate decision, and US Non farm payroll report.

After a bearish break down last week, gold prices have stabilised over the past few days, as the financial and investing world looks to the European Central Bank (ECB) and its president, ‘Super’ Mario Draghi.

The gold bears finally won the battle. After weeks of trading in an increasingly narrow range, gold finally broke down earlier this week, dropping through support in the USD $1280 range and falling all the way to USD $1258oz where the metal currently trades.

Another relatively uneventful week for precious metal prices so far, with both gold and silver still trading in relatively narrow ranges. Using the London PM Fix as our guide, USD gold has averaged USD $1293.60oz for the month of May, with the high/low range for the period coming in at USD $1306.25oz and USD $1278.50oz, respectively.

Precious metal prices have been relatively uninspiring the past few weeks. Whilst there has been some intra day volatility, the PM fix for gold has been stuck in a less than $50 range, trading between USD $1278oz and USD $1325oz.

Gold prices eased substantially overnight, as a reported pullback of Russian forces in the Ukraine dented the yellow metals safe haven demand.

It’s a huge week of economic data. Not only did we have US GDP figures overnight (they were horrible – more on that below), but we’ve had the latest FOMC meeting, and non-farm payrolls are due later this week in the USA too.

With the first three months of 2014 complete, this quarterly directions report will take a look at how the year has unfolded so far, with a look at market returns, as well as where gold might head in the short term.