10 Years Since Lehman Crashed

Gold is currently trading at USD $1203oz, whilst silver is at USD $14.30oz, with the precious metal market continuing its recent consolidation. In Australian dollar terms, gold is trading at $1673oz, whilst silver is sitting just below $20oz, with the local currency sitting at USD $0.719, boosted of late by stronger than expected GDP and employment figures.

In this market update, we cover a number of topics, including:

• Current positioning in the gold and silver market

• A look at the Gold to Silver Ratio

• An update on central bank gold reserves

We also “look back” at the 10-year anniversary of the fall of Lehman brothers, and share our recollections from that time period.

How Short is the Gold Market?

John Reade (@JReade_WGC) is the Chief Market Strategist at the World Gold Council, and a “must follow” analyst in the precious metals markets.

This week he provided a great update on current positioning in the gold market, titled “stubbornly short”, which included a handful of great charts, some of which I’ve included below.

The first shows gross long managed money positions (speculators betting on higher gold prices), which were essentially unchanged on the previous week, at 10.5 million ounces. However, as you can see, managed money longs are now less than a third of the level they were back in May 2016 (around the time of Brexit), and substantially lower than the levels seen in 2017 and early 2018. There are still some gold bulls out there, but nowhere near as many as there use to be.

The real excitement (if you can call it that), is on the short side, where there has been a literal explosion in positioning over the last few months, with the managed money shorts now approaching 19 million ounces, driving the net short position to 7.9 million ounces.

What is unprecedented is how fast these short positions have been piled on, with the positioning growing by a factor of 10 since the start of the year. To help put it into context, a gross short position of 19 million ounces is equivalent to 590 tonnes of gold, almost 2 years of Australia’s gold production.

Gold to Silver Ratio hits 25 year high

Futures positioning in the silver market has approached extreme levels as it has with gold, with the net speculative short position in silver (using data back to the early 1990s) at all time highs, a sure sign of just how bad sentiment is in the precious metals market.

This has led the Gold to Silver Ratio (GSR) to reach a near 30 year high this week, with one ounce of gold now worth 85 ounces of silver. The chart below plots the ratio since the late 1990s, and makes clear how historically cheap silver is on a relative basis.

Regular readers of ABC Bullion market updates will know we are silver investors, and think the metal will outperform gold to the upside in the next meaningful bull run in precious metals.

To help picture how significant that run might be, its worth looking back to 2003, and again 2008, which were the last two times the GSR approached 80:1.

Back in 2003, silver was sub USD $5oz, whilst gold was closer to USD $360oz. 3 years later, silver was USD $12oz and gold was closer to USD $600oz. 
 
In 2008, last time the GSR approached these levels, silver was USD $12oz, and gold was around USD $880oz. By 2011, silver had hit over USD $30oz, whilst gold was closer to USD $1600oz. As you can see, if history is any guide, there is a very good chance silver will meaningfully outperform in the years ahead.

Central Bank Gold Reserves

The Reserve Bank of India made the news recently, purchasing gold for the first time in a decade. Adding 8.5 tonnes to their holdings, it was not a significant purchase in terms of size (their last purchase was 200 tonnes from the IMF back in 2009), but is a sign that they are again looking to build their holdings of the precious metal as part of their FX reserves. 
 
The chart below, which comes from this excellent blog published by Bron Suchecki (@bronsuchecki) on the Gold Industry Group website, highlights the change in central bank gold reserves since early 2000, with total holdings now above where they were at the turn of the century. 
 
What the chart also makes clear though is that the vast accumulation of reserves since the GFC hit has been down to six main participants: China, Russia, India, Kazakshtan, Mexico and Turkey, with holdings amongst other central banks essentially static.

Source: Gold Industry Group
 
Commenting on these gold purchases, Suchecki noted: “This is a major structural change in global central bank attitudes towards gold after decades of selling. Clearly the policy shift to maintaining stable gold holdings reflects broad central bank concerns about financial markets and geopolitics. With little in the current global economic and political environment to support any reason to change in this conservative position, it should provide long-term underlying support to gold prices.”
 
We agree wholeheartedly, and think that central bank purchases, alongside the vast purchases of gold bars, coins and jewellery in Eastern markets suggest gold is unlikely to re-test the 2015 lows around USD $1050oz, even if Western demand remains lacklustre for some time to come.

10 Years on from the Fall of Lehman

This week marks the 10-year anniversary of the fall of Lehman brothers, which filed for Chapter 11 on the 15th September 2008. Whilst many of our parents generation remember where they were when Armstrong took that one giant leap for mankind and where they were on the day Kennedy was assassinated, this event, coupled with the September 11 terror attacks, are the two “where were you” moments of the previous decade. 
 
Regular readers of ABC Bullion market updates will know that I don’t think the core problems in the global economy or in our financial system that were glaringly exposed during the GFC have been truly fixed, instead papered over with ever cheaper money, central bank stimulus and artificial support of financial markets. 
 
I won’t expand on those thoughts in this market update, though I’d suggest readers look at this report from Bloomberg, which includes a couple of great charts on where we are a decade on from the fall of Lehman, highlighting the vast expansion of central bank balance sheets, and the political consequences of the steps policymakers have taken in the last decade to, paraphrasing ex president Bush “save the free market from itself”.
 

Instead I wanted to share a couple of recollections and experience at the time. From 2006 to 2009 I was working at Cazenove Capital (since bought by Schroders) in the United Kingdom, heading up a team of analysts that reviewed performance and risk for the companies retail and private clients, as well as its hedge funds. To this day, apart from working in the gold industry (where I’ve had a substantial portion of my own money invested since the early 2000’s) that job was by far my favourite, as I had a great team working with me, and the company had a great culture.
 
Nevertheless, as a contractor, I remember feeling very worried that my job was at risk (fortunately that didn’t prove to be the case), as there were obviously mass lay-offs across the financial sector. 
 
As a personal investor, it was also a very interesting/scary time – as my gold positions helped me feel relatively secure, though I was a little concerned when gold originally sold off during the crisis, and was particularly surprised to see gold stocks get absolutely hammered, alongside the broader equity market.
 
That time period really reinforced why, despite their obvious relationship, it’s useful to look at gold and gold stocks as distinct asset classes, as they play very different roles in an investment portfolio. 
 
There are two other very clear memories I have. The first was the absolute carnage in the AUD, which plummeted in 2008. For most of the time that I was in the UK, the AUD was actually appreciating against the pound, something that was quite annoying for a person earning GBP but occasionally looking to send money back home. The GFC ended up being a great opportunity for currency repatriation, as in the space of a few weeks in mid 2008, GBP appreciated from approximately 2.05 AUD to 2.60 GBP. 
 
The final memory is one that was particularly surreal, and that had to do with the failure of Northern Rock, and the ‘bank-run’ that followed its collapse. Every morning I use to get off the tube at Bank station, walk past the Bank of England and go into the office on Moorgate, which happened to have a Northern Rock branch on it. 
 
I can distinctly remember a rather gorgeous sunny day in London (a bit of a rarity in itself at times), walking to the office when I noticed this huge crowd of people lining up down the street. They were all waiting to go into Northern Rock once the bank opened up for the day, looking to take their money out, transfer to another bank or just check that their funds were indeed safe. It was an eerie and uncomfortable moment, and definitely one of the most memorable moments of that entire time period.
 
There are plenty of people in the gold space who are expecting another financial crisis. When and if it comes, moments like that should serve to remind us that the pain will not only be felt by those who helped cause it, but by regular hardworking people. We should be careful what we wish for. 
 
Before we finish up, we’ll leave you with this link to Matt Taibbi’s latest article in Rolling Stone, which looks back at that crazy time period a decade go.

Until next time,
 
Jordan Eliseo
Chief Economist
ABC Bullion

 
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.