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All Eyes On $1,300

18 January 2019

Waiting and watching in anticipation to see if gold is able to crack through near term resistance at the $1,300 level. We are currently trading around USD$1,292 and silver $15.50 per ounce.
 
With the AUD slipping back to 0.719, gold trades at $1,800 and silver $21.72 in local currency terms, at time of writing.
 
It seems gold is searching a reason to break north of $1,300 convincingly, so I am undecided if we will actually see this short-term, or if we need a consolidation or pullback on the back of profit taking from the sharp rally we have seen since December.
 
Fresh longs might be sitting on their hands until this USD$1,300 level breaks, but if it does, one can expect the rally to continue and move higher quickly in the short-term, so all eyes are on this level currently.
 
So expect a decent sized move in gold soon, we just don’t know which way yet, as we trade into a tighter and tighter range this week. We can see the current pennant setup below, and a break either side should provide us with a good indication of short-term direction.
 
Gold price chart
 
After a sharp spike earlier this month on the back of the AUD/USD flash crash, gold in AUD has consolidated under the $1,800 level and just moved back above this week.
 
We had quite a few clients taking advantage of the rebound in the AUD to top up their portfolios this week, and we see the chart below slowly looking like it could be starting to roll over. After such a large move from December there is some risk of a short-term pullback from $1,800 if US dollar gold fails to break through $1,300, so watch this level very closely.
 
AUD/USD crash 
Source: DailyFX
 
In other metals, silver is flat, platinum is flat and palladium has gone bonkers and trades at almost AUD$2,000 per ounce. Somewhat an example of what can happen in the precious metals space when there are issues with physical supply, as auto manufacturers scramble to take delivery of the metal, whilst strikes in some major mines spur supply concerns. More on this here.
 
Many believe the entire precious metals space is at risk to something similar happening if everyone actually tried to take physical delivery at once, but particularly for platinum and palladium, there are very little above ground stockpiles, so it can lead to some sharp moves at times of short supply.
 
The Platinum/Palladium ratio increased even further and we are actually seeing a big tick up in platinum sales at ABC Bullion and are currently temporarily sold out of 1oz platinum varieties. We are taking pre-orders so clients can always lock the price in and take delivery in the near future.
 
The chart below compares platinum, palladium and gold over the last 20 years and showcases the breakout of palladium prices to new all time highs, surpassing gold.

Platinum/palladium 
Source: MarketWatch

 

China Turns Stimulus Tap On, Further


Chinese QOQ GDP numbers are somewhat bizarrely different to the rest of the world, whereby they don’t actually seem to change, at all. From Trading Economics, one can see below that reported GDP growth miraculously only had a 0.2% divergence each quarter of the last few years, from January 2016 to July 2018, whereas in comparison with the US, Japan, and Australia respectively, you can see China sticks out like a saw thumb, receiving a 10/10 for consistency.
 
GDP China
GDP U.S
GDP Japan
GDP Australia
 
So for a country quickly going down the 1984 path of complete control, it’s impossible to know what the true numbers are, but one would assume they wouldn’t be deliberately fabricating them lower.
 
Those who have seen the film “Enron: Smartest Guys in the Room” would know that once you fudge one number it becomes increasingly difficult to reverse course, as the next number is even further off the pace.
 
According to the Chinese National Bureau of Statistics (‘Ministry of Truth’) the country is still booming with apparently an annual GDP growth above a huge 6%, but somehow needs further monetary stimulus?
 
Sure, makes sense.
 
So this week saw the People’s Bank of China inject a record breaking $560 billion Yuan or USD$83 billion into the country’s financial system to shore up liquidity. This is the highest ever one day injection.
 
Something doesn’t seem to add up, but the statement from the PBOC was as follows: “At present, it is the peak of the tax period, and the total liquidity of the banking system is declining rather quickly”  (Source: CNBC)
 
We have talked previously about issues in the Chinese banking sector, with shadow banking and dodgy wealth management products being sold to investors. There are stories surfacing of investors losing their entire investments and you can read more about it in an interesting Financial Times article here

Financial Times quote 

The second largest economy in the world is starting to look like a giant house of cards, which experienced an economic boom fuelled largely by a huge credit expansion. With the level of central planning in the economy, one can only imagine the level of inefficiency when it comes to the distribution of capital, and this is even before you would look at the level of corruption within the political party.
 
The largest risk to the global economy could well be the unwind of the credit-fuelled bubble and experiment in central planning which we have seen China embark on for the last decade. If we continue to see more PBOC ‘injections’ into the financial system this year, we will know that there is a deeper underlying liquidity problem in the banking sector, and this is not a seasonal problem like the PBOC would suggest.
 

Bearish Equities, Very Bearish Property

 
Lastly, some interesting results from an annual investment survey conducted by Livewire suggests there is a decent number of Australians quite worried about the outlook for the Australian economy.
 
In summary the majority of responders were anticipating the RBA to either hold or cut interest rate, GDP to have at least one negative quarter, and both equities and property to move lower in 2019.
 
You can find more detail in the article here
 
Many Australian investors are seemingly starting to get concerned about the property market and what effects it could have on our index given the major banks are heavily exposed and make up a huge percentage of the ASX200 market cap.
 
There wasn’t any mention of gold in the survey, but we are certainly seeing sentiment amongst everyday Australians shift in favour toward owning a decent percentage of their portfolios in gold as we move into 2019, as a huge amount of transactions at ABC Bullion last year were first time precious metals investors.
 

Until next time,
 
John Feeney
ABC Bullion
 
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