Has Gold Hit a 10 Year Low?

Gold prices have largely stabilised around USD $1310oz this week, arresting a slide that has seen the yellow metal pull back from the USD $1360oz region over the past three weeks.

Dollar strength has of course been the primary driver of recent moves in the yellow metal, with the USD dollar index, which has been on an almost relentless move higher since the middle of April, pausing over the last couple of days.

This has helped gold stabilise, with prices over the last three trading days seen on the chart below, with gold holding an important low between USD $1300-USD$1305oz for now.

Crucially, levels around USD $1300oz coincide with the 200 day moving average for gold, so its no surprise that gold has had a little bounce over the past day or so, with the market now looking forward to the non-farm payrolls report due out tonight in the US.

To be clear, gold could still fall through USD $1300oz, as the market is approaching a seasonally weaker period in May and June, whilst any further rally in the USD will also put downward pressure on prices.

Sentiment is largely neutral, whilst commitment of traders data isn’t wildly bullish yet either, with commercials still holding relatively high short positions.

Speculative money has worked off some of its froth, but is not year near the kind of lows that tend to coincide with the beginning of major gold rallies.

In AUD terms it's an almost completely different story however, with the yellow metal still trading at or near AUD $1750oz, whilst silver is just shy of AUD $22oz.

For local investors, it's the AUD price that matters, and given the downside pressure building on the currency (more on this below), accumulation of metal around these levels will likely pay off handsomely.

Gold should also benefit from the broader appeal of increasing exposures to commodities as a whole, with the team at Goldmans stating recently that they; “believe the macro backdrop for commodities is as good as we have seen in years, suggesting large allocations to the sector”, whilst also commenting that; “the strategic case for owning commodities has rarely been stronger.”
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The suggestion that gold will perform well alongside broader commodities is backed up by the following chart, which plots gold and crude oil prices since 2000, with gold often leading the way.

Latest Gold Demand Data

The World Gold Council this week released their latest Gold Demand Trends report, which suggests there has been a 7% year on year drop in total gold demand in Q1 of 2018, with demand the lowest it has been in 10 years.

Demand, which came in below 1,000 tonnes for the quarter, is driven by multiple factors, with the worst hit sector being retail bar and coin demand, which fell by 15% year on year, as Chinese, US and German investors pared back their accumulation of physical metal

Gold ETFs fared a little better, with nearly 40 tonnes of demand coming in from the United States, whilst central banks accumulated over 100 tonnes of gold in Q1 this year, continuing their steady accumulation which dates back to the start of the GFC.

Indeed since 2010, they’ve only had one quarter where they were net sellers as a whole, as you can see in the chart below.

This data aligns with what we are seeing at ABC Bullion with our own retail clients. Despite an uptick in equity market volatility and a reasonably strong gold price, investor appetites remain subdued, whilst many longer-term precious metal investors have liquidated holdings in recent times.

This should be seen as a positive and healthy sign for the gold market, as its solid performance over the last few months, and indeed since the cyclical low in 2015 near USD $1050oz, has occurred despite a plethora of headwinds including a rising Fed funds rate, an uptick in global growth and a largely continued march higher on Wall Street.

Look at the Gold Diggers?

Regular readers of ABC Bullion market updates will know that we look at physical gold and investment in gold mining companies as two distinct investments and asset classes.

Over the long run, gold is as low a risk an investment as one can make – and belongs in the defensive part of ones portfolio, whilst gold miners are generally high risk/high reward investments that belong in the equity component of a portfolio. That is certainly how I treat them in my own portfolio.

The higher risk in gold mining is not just in the operational and management risk one takes when they buy into a gold miner, but also the volatility. The following chart, which plots the performance of gold (gold line) and gold miners (blue line) since the turn of the century, demonstrates that higher volatility and drawdown risk clearly.

As you can see, back when the GFC hit, and especially in the aftermath of the USD peak in gold prices back in 2011, the miners are a significantly riskier investment, falling by up too 70%, whilst gold has never had a fall anywhere near that magnitude over the same time period.

They are not for the faint hearted – though obviously there are periods where they offer substantial upside.

The reason we are commenting on them in this update is that the chart included shows a very distinct reverse head and shoulders pattern for both gold and gold miners that has developed over the past few years.

They are worth keeping an eye on, as if they hold near to current levels, even as the USD is rallying and gold is stuck at the lower end of its recent trading range, then it gives more weight to the argument that the entire precious metal complex is on the verge of moving decisively higher!

Global Growth: As Good as it Gets?

On the subject of global growth, it increasingly looks like it might be rolling over, with late 2017/early 2018 possibly the high point in this cycle.

The following chart, produced by Westpac, helps illustrate the point, focusing on Asian export growth, which looks has clearly peaked, and may well turn negative year on year by the middle of this year.

Other indicators from the region are also suggesting a slowdown, with global industrial production (ex United States) also trending lower, though still positive, whilst Korean industrial production, has already turned negative in terms of year on year growth.

The European “recovery” has also recently lost some steam, something the ECB is acutely aware of.

If fears of a slowdown in global growth grow, then it’s likely we could see a move toward more defensive assets, which precious metals will benefit from.

Australia: Will Rates Ever Rise?

It’s been an interesting week for Australian economic news, with the country reporting a huge trade surplus for March, the third consecutive month of + AUD $1 billion results.

All of this will feed through to GDP growth figures, with Capital Economics stating that Q1 GDP growth may come in as high as 1%, joining a handful of commentators who are upbeat on the prospects for economic growth.

Interestingly enough, despite this data, the outlook for local interest rates continues to deteriorate, with large banks and asset managers changing their tune on what they expect next from the RBA, with a more dovish outlook evident.

This week we’ve seen CBA push back their expectations of the timing of the RBA’s next rate hike. Up until this week, they were forecasting a rate hike to occur in November this year, on Melbourne Cup day.

But they’ve now pushed back the timing, suggesting a hike won’t arrive until February of next year, citing a decline in house prices, a pick up in bank funding costs, and tightening lending standards (which will affect all banks, including CBA obviously), as the key reasons to the changed forecast.

CBA weren’t the only ones, with AMP arguably even more bearish, not surprising given the following chart, which overlays Sydney auction clearance rates and house price growth, with RBA rate cuts noted on the chart too.

A recent AMP economic update including the following passage, which explains their outlook for rates locally (bolded emphasis mine); “While the global economy is seeing its fastest growth in years and the US Federal Reserve has increased rates five times since December 2015 and is on track for more hikes this year, the Reserve Bank of Australia (RBA) has now left interest rates on hold for a record 21 months in a row. The Australian economy is in a very different position to the US. While the RBA continues to expect that the next move in rates is most likely to be up, and we tend to agree, we now don’t see a hike until sometime in 2020. And the next move being a cut cannot be ruled out.”

AMP included a handful of reasons why rates won’t rise until at least 2020 including growth falling below RBA expectations, continued low growth in wages and inflation, tightening bank lending standards, slowing housing prices, themes that are consistent with the view of CBA, and the updates we’ve been providing clients of ABC Bullion for some time now.

In all likelihood, this can’t but help but put downward pressure on the Australian dollar, which will be a specific boost to local precious metal investors.

Until next time.
Jordan Eliseo

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.