If nothing else, this week’s price action in gold proves that the market sure has a sense of humour. Many observers were sure that the failure of the Swiss referendum over the weekend, which would have forced the Swiss National Bank to increase gold holdings to 20% of total reserves, would be the final nail in gold’s coffin, and that precious metal prices would crash lower.

Indeed markets softened up last Friday, trading sub USD $1170oz for gold, and early on Monday it did indeed look like a crash was on our hands. At one point, gold traded into the USD $1140oz range, whilst silver, unbelievably – crashed below USD $14.50oz.

It was around this time that a number of incredibly bearish articles regarding the outlook for gold were issued, with my particular favourite ‘charting’ gold’s imminent demise to USD $600oz

Instead, the precious metal market rebounded violently, on heavy turnover too, with gold shooting back above USD $1200oz, whilst silver, incredibly, went back above USD $16oz, a more than 15% move in one day.

Whilst this has confounded many a pundit, the sharp rally back was in many ways to be expected. After all, sentiment was already terrible leading into the Swiss referendum, and at the end of the day – nothing really changes as a result of it.

The Swiss National Bank wasn’t buying gold last week, and it won’t be buying gold this week

Furthermore, last week we also saw the Indian government scrap their 80:20 rule regarding gold imports. This was one of many rules the Indian government and Reserve Bank implemented over the course of the last 18 months in an attempt to curb gold imports and get their current account under control.

The relaxation of these rules has added some confidence to the market, not that it will necessarily lead to a immediate increase in physical buying

Finally, in further evidence of how tight supply is in the physical gold market, GOFO rates, which is short hand for Gold Forward Offered Rate have been in negative territory for some time now.

For people new to gold, GOFO is a bit of a technical term that takes some explaining.

I’ll write more on the subject another time, though suffice to say it’s a rare occurrence for GOFO rates to be negative, and when it occurs, it’s evidence of tightness in physical markets, and strong demand for the metals.

All up I see the last few trading days as incredibly positive for precious metals, and if gold can close above USD $1200oz for the week, we could see higher prices leading into Xmas and the New Year

Even if we see gold prices stagnate for the next few weeks, and close the year out essentially unchanged for the year, I think it’s been a great year for the precious metal.

That might sound strange considering gold (in USD terms at least) is essentially unchanged for the year, but considering the following, I think we should be very happy

This year – the gold market has had to shrug off

• The cessation of all quantitative easing by the Federal Reserve

• A huge rally in the US Dollar

• Plunging commodity prices

• Further equity market strength

For Australian dollar investors, gold is actually up nearly $100 an ounce, or 6.5% based off an end 2013 price of $1346oz. That’s better than cash, and in line with equities and what superannuation funds are likely to end up delivering

Considering the sell-off in the gold market last year, and the almost universal pessimism that the gold market was facing heading into this year, I think investors in precious metals should be satisfied with what 2014 has delivered so far.

The Australian dollar price of gold has reclaimed $1400oz, up 4% for the year, as weakness in the local currency, which has fallen to just USD $0.85 cents, buoyed prices for domestic investors

In USD terms, prices have been range bound this week, trading either side of USD $1200oz, as the market digests a series of disappointing economic data releases from the United States, with one eye firmly on the pending Swiss Gold referendum, which will take place this weekend.

As a quick reminder, if the referendum does pass, going forward, the Swiss National Bank (the equivalent of our RBA) will be required too

• Take steps to increase their gold holdings to 20% of total reserves

• Repatriate all physical gold held overseas back inside Switzerland’s borders

• Cease all sales of gold bullion

As I mentioned last week, from the conversations I had with people in Switzerland when there earlier this month, nobody had even heard of this referendum, so it’s definitely not something that there is widespread knowledge nor debate about, though this may have something to do with the fact that the Swiss hold many of these referenda on an annual basis.

Alternatively, it could be that when I was there, many of the Swiss were all to anxious, looking forward to the Davis Cup Final, which was completed last weekend, with Roger Federer and Stan Wawrinka bringing home the cup with a victory over France.

Either way, whilst the referendum has the potential to alter the gold market in a substantial way, it does need to be stated that it’s not high on the priority list for average Swiss citizen, at least as far as I could tell.

The Superannuation industry in this country is huge.

So huge, that it’s set to hit the $2 Trillion mark by early 2015, truly extraordinary for a country of only 22 odd million people and with an economy thats only roughly $1.5 Trillion in size.

The industry also charges a hefty clip on fees too, with the professionals responsible for managing Australia’s precious life savings earning close to $20 billion last year.

It's roughly $2k for every Aussie contributing into the system, and they get a legislated pay rise of 9% per annum even if markets go nowhere, such is the nature of a percentage based fee model.

But this article is not about fees - but about another statistic from a short piece i read today (20th November 2014) in the Financial Standard, which really stood out, and that was the allocation to commodities.

As you can see from the attached article, according to the author, some $672 million is invested in commodities. This represents just 0.04% of the total pool of Superannuation assets, which is $1.87 Trillion.

The data quoted came from a just released APRA report, which can be viewed here

Equities comprise 50% of institutional superannuation fund assets, whilst 33% is in cash and fixed income, 8% is in property, with just 4% in infrastructure and a further 4% in ‘other’.

In reality, when you include commodities held through other vehicles, the number is probably higher, though not much in percentage terms, with research firm Chant West suggesting just 0.4% of the superannuation pool is invested in commodities, or about $7.4 billion total.

Either way, no matter which data source you use, the bottom line to this analysis is that that the exposure to commodities in Australian superannuation funds is incredibly low, even though some of the equity exposure is obviously related related to commodities (think mining companies like BHP, RIO, Fortescue and Newcrest).

This is especially relevant for gold, which has outperformed every major asset class in the decade to June 2014, as the following table highlights.

As a quick aside, the less than $7.5 billion total invested in commodities in Australian superannuation funds isn’t even equal to one year’s worth of Australian gold mining output, which is worth just over $10 billion at todays market prices.

The outperformance of gold over the traditional assets that dominate superannuation portfolios could well continue in the coming years, especially in light of the current economic challenges being faced locally and abroad, and the risks that could come to the fore in financial markets in the coming years.

As such, especially when you consider that gold tends to do best when real interest rates are low (like they are all around the world today), physical gold should be a core portfolio holding in the coming years as, apart from the opportunity for much higher prices, it also offers

• Portfolio diversification as it’s uncorrelated to traditional assets

• Protection against inflation should that pick up in the coming years

• A hedge against further falls in the Australian dollar

• A simple, liquid and transparent hedge against periods of severe market turmoil, like the GFC

Institutional superannuation funds, with their minimal allocation of client money to commodities as a whole, let alone gold specifically, could be missing an opportunity here, and it's one of the major reasons our SMSF clients speak to us about when they talk about why they set up a SMSF to start with, and why they're adding physical bullion to their investment portfolios.

Gold prices eased overnight, falling as low as USD $1175oz, as the latest poll out of Switzerland suggested just weaker support for their upcoming referendum regarding increased gold holdings for the Swiss National Bank.

The weakness in the price overnight disappointed the bulls, who were hoping for gold to build on its latest rally above USD $1200oz, especially in light of supportive news regarding central bank buying out of Russia, and a more positive technical set up.

Back to Switzerland, and in just over a week, the Swiss are set to vote on the “Save our Gold” initiative, which, if passed, would require the Swiss National Bank (the equivalent of our RBA) too

• Take steps to increase their gold reserves to 20% of total reserves

• Repatriate all gold held overseas back inside Switzerland’s borders

• Cease all sales of gold bullion

Whilst there is still a chance the referendum could pass, the latest official poll would suggest otherwise, with support falling to 38%. Support for the initiative had been as high as 44% in October, whilst those opposed to the initiative now number some 47% of those polled.

After falling as low as USD $1130oz on Friday the 7th November, gold staged a massive reversal, rallying some USD $50oz to close out the week just below the USD $1180oz mark which had previously marked a triple bottom for the precious metal.

Gold prices pulled back overnight, as the Federal Reserve announced the winding up of its current round of Quantitative Easing. Whilst this announcement was expected, the accompanying policy statement was more ‘hawkish’ than the market expected, and was a major reason driving the gold price as low as USD $1207oz.

Silver was also affected, and is currently sitting just above USD $17oz.

For Australian dollar investors, this pullback has brought gold back below the AUD $1400 level, maintaining the relatively tight range it’s been in since April of this year.

After a solid three weeks, and a strong bounce of the USD $1180oz level in early October, gold prices pulled back overnight, and are currently trading at USD $1232oz, down USD $13oz from their intra day high.

Last week, ABC Bullion was delighted to attend the 7th annual Gold Investment Symposium, which was held at the Sofitel Sydney Wentworth Hotel. As we have for the past few years now, we were proud to sponsor the event alongside our sister company Custodian Vaults, and were delighted to catch up with not only a number of key industry contacts, but also to talk to many of the attendees, including a large number who are clients of ABC Bullion.

Considering the general pessimism and apathy regarding gold as an investment right now, attendance was not as high as it was back in 2011 when gold was threatening to push through the USD $2000oz mark.

From a contrarian perspective, this is of course encouraging news, and whilst no one was denying or attempting to gloss over the pain that the last three years has brought, their was a general perception that maybe, just maybe, the precious metal community has weathered the worst of this corrective storm, and there will be more profitable times ahead.

As always, Kerry Stevenson and her team did a great job getting together a list of great speakers, including James Turk, founder of Goldmoney.com, David Baker, the Managing Director of the Baker Steel Gold Fund, and Brent Johnston, the CEO of Santiago Capital, an ex Wall Street guy who learned what financial markets were really all about years ago and whose been helping his clients protect their wealth with precious metals ever since.

A strong headline non-farm payroll report out of the US last Friday saw gold prices finally break below USD $1200oz. This weakness continued into the early part of this week, with the metal heading into the low USD $1180oz range, a key level that marked the bottom in both June and December of 2013.

Since then, there’s been an impressive rally in the precious metal complex, with gold currently trading some USD $40oz higher than where it was earlier in the week, sitting at USD $1223oz, with silver at USD $17.35oz

For AUD investors, a persistently soft AUD (currently sitting around 87 cents) sees AUD gold prices hovering just below AUD $1400, a reminder again that whilst it’s the USD price of gold the market focuses on, we’re getting a smoother ride down here.

So the big question now is

Was it a triple bottom?

Gold prices bounced around overnight, with the final quarter of the year shaping up as critical in where the metal heads moving into 2015.

After a very disappointing Q3 return, many are predicting further downside for the precious metal sector, especially with silver, often seen as a leading indicator of where gold will head, plunging to new lows lately.

Whilst our attention has been focused on the metals market, its worth pointing out that the broader stock markets have also been doing it tough lately, with the ASX 200 off the better part of 6% in September, whilst European and US stocks started Q4 on a horrible note, off 1% (Europe), and 1.3% (US) respectively.

Indeed some indices have fared even worse lately, with the Russell 2000 index now officially in correction mode, off over 10% from its March highs, and looking like there could be further downside ahead.

As you can see from the chart below, the Russell 2000 has just breached a trend line of support that goes all the way to the 2009 cyclical bottom in equity markets.

Over the last decade or so, there has been a veritable explosion in the number of Australians setting up Self Managed Super Funds (SMSFs), and taking control of this key financial asset.

Whilst transparent costs have been on the key drivers, investment flexibility has also been important, with the ability to buy into asset classes that retail and industry funds simply will not allow another driving force behind Australia’s ever growing SMSF army.

Whilst direct shares, property and term deposits are the major assets that SMSF Trustees tend to build their portfolios around, physical gold and silver are also allowable investments in a SMSF, and at ABC Bullion, we’ve seen a huge increase in the number of Trustees opening accounts with us, so that they can incorporate precious metals into their portfolio.

Below, we list the eight reasons we think our SMSF clients have made the right choice to incorporate bullion into their portfolio, and why other trustees may wish to follow suit

1. Gold has very strong long-term returns

Anyone who has held a core position in gold bullion for the last decade or so has done incredibly well, despite the correction we’ve seen since 2011.

This is captured neatly in the following table, which highlights both the short, medium and longer term returns of a variety of asset class returns, including the areas where both SMSF Trustees and large superannuation and pension funds tend to concentrate their investments in.

If you were to make investment decisions for your portfolio based on the weight of reporting one sees in the financial news, then there’s almost no question that the gold bull market is dead and buried, and investors should sell.

This week we have seen an absolute cavalcade of negative press when it comes to the outlook for precious metals, with a series of ever more dire price predictions.

Not surprisingly, this comes off the back of yet another poor showing from the precious metal complex last week, which saw gold trade down toward the USD $1200oz mark, whilst silver was hit even harder, falling below USD $17.50oz at one point.

This weeks report will look at some of the dire predictions regarding the short-term outlook for the metal, feature some impressive charts, and most importantly, argue why we may be closer to the bottom than many think.

On the surface, it might be hard to imagine that a group of white-collar workers operating out of an air-conditioned office in the middle of the Sydney CBD have jobs directly linked to the men and women working the goldfields of Western Australia, but it’s true.

Bullion dealers like my employer ABC Bullion, who’ve been selling precious metals from our Sydney head office (and our recently opened Perth office) for more than 40 years, are keen to see a healthy and thriving precious metal industry, and it obviously starts with bringing the gold out of the ground.

A healthy bullion industry is particularly important for Australia. Make no mistake about it – physical gold is big business down under. We produce approximately 250 tonnes of gold per annum, worth about $11 billion Australian dollars, which is over half of a percentage point of the nation’s GDP.

Gold is also a major export earner for the country, making up some 5% of our national exports, according to research published by the World Gold Council using statistical data from 2012.

This is particularly relevant today considering net commodity exports have been a significant driver of overall economic growth in Australia these past few years.

It’s for these reasons that I’ve taken a keen interest in the #heartofgold campaign running in Western Australia. It is raising awareness about the importance of the gold mining industry to the Western Australian economy, and the potentially disruptive impact higher royalties could have on the sector.

Whilst it’s obvious to many that drilling companies, engineering contractors, geologists, parts suppliers, and companies providing heavy machinery used on the gold mines would be negatively affected by any disruption to the gold mining industry, the impact wouldn’t just stop there.

It could also be felt amongst

Gold prices have eased back further this week, with a sharp plunge overnight taking the yellow metal down to USD $1219oz, down 1% since last Fridays London PM Fix.

Silver has also weakened, currently sitting at $18.42 an ounce – also down about 1% over the past 4 trading days.

The big news overnight was of course the latest meeting by the Federal Reserve, who, as expected, further reduced the size of their current QE programme, this time to $15bn a month.

Other key comments and takeaways from the meeting were as follows

• They left the Federal funds rate unchanged at 0.25 percent

• They repeated it would be appropriate to maintain “highly accommodative” monetary policy

• They maintained their pledge to keep interest rates low for a “considerable time” even after QE ends

• They plan to end the QE progamme at their next meeting, absent any shocks to the economy or financial markets

• They stated that according to their models, inflation is running below their long term goals

• They stated that they see the US economy expanding, and the labour market improving, but that significant underutilization still exists in labour markets

All in all this was largely as markets expected, with no major surprises thrown in by the Fed, with the bigger news of the night probably the decline in headline US Consumer Price Inflation, which came in at -0.2% for the month.

Originally gold had largely ignored the developments in CPI and the pronouncements from the Fed, trading above USD $1235oz for the majority of the day before plunging some $15oz in fairly quick succession, a move repeated in silver, which gave up $0.30oz in a similar time frame.

All in all, the current weakness in the gold price can be mostly attributed to the strength in the United States Dollar, which has been on an absolute tear of late. Indeed the USD has been in a solid uptrend for the better part of three years now, as the chart below highlights clearly. In that time, the US Dollar index has strengthened from the low 70’s to the mid 80’s, a rally of some 15%.

Not surprisingly, this has coincided with the 3-year correction in the gold price that we have endured. For AUD investors, the correction has been less severe, as the declining AUD (which fell back below USD $0.90 overnight) has helped cushion the blow.

It’s been a disappointing start to September, typically one of gold’s strongest months, with precious metal prices weakening across the board. Gold, which started the month around USD $1285oz, has fallen to just below USD $1250oz, whilst silver is closer to USD $18.90oz, down 3% in the first two weeks of the month.

Strength in the US Dollar, which has rallied substantially against most currencies these past few weeks, has been the major factor behind the weakness in the precious metal market these past few days, whilst the lack of response in the gold market to geopolitical developments in the Ukraine and Iraq/Syria has also concerned investors, as typically you’d expect more of a safe haven rally in precious metals.

Gold ETF holdings, which had held up relatively well for the first nine months of the year, have begun decreasing again, with the flagship GLD ETF now sitting at just 788 tonnes, down approximately 20 tonnes on where holdings were in the middle of July.

On the futures market, open interest is close to its lowest level in five years, highlighting lack of investor demand, whilst managed money traders (i.e. short term investors) have been adding to their short positions quite aggressively of late, something we expect to have continued this week, in light of the price weakness.

Meanwhile, a whole heap of technical analysts have released pieces in the last few days pointing to violated moving averages and the like, with most fairly bearish on what comes next for the precious metal market.

On the physical side, Shanghai gold premiums have risen in the past few days, indicating support from the world’s largest gold consumer and producer, whilst demand out of India can also be expected to stabilise if not strengthen in the coming months.

As for where the market heads from here – we reiterate previous messages that we’re still in the process of bottoming, and that one final wash out in the sector wouldn’t be entirely surprising

As you can see from the chart below, which goes back to the start of 2011, gold had a burst to the USD $1900oz level 3 years ago, followed by three failed attempts to bust through USD $1800oz.

Since then, we had the original flash crash of April 2013, which saw prices ease down toward the USD $1300oz mark, and since then a double bottom around USD $1200oz.

As a result, another test of the USD $1200oz mark could well be on the cards in the coming weeks.

For me personally, dollar cost averaging into the sector at these levels makes a lot of sense. Calling an exact bottom is nigh on impossible, and I’m happy enough being able to buy gold and silver at today’s levels.

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.