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Aussie Banks Being Ghosted

18 September 2020

Precious Metals Commentary

With very low volatility in precious metals again this week, we are currently tracking sideways with not too much excitement in the sector for now. Metals were slightly higher this week, buoyed by USD weakness, with gold rising to US$1,950 and silver just above $27.00 at time of writing.

The AUD/USD continues to bounce between 72.5 and 73c in a very tight trading range, so metals in AUD terms continue to be range bound. The longer-term outlook for the AUD is still down in our view, with the RBA saying in its Monetary Policy Meeting that “a lower exchange rate would provide more assistance to the Australian economy in its recovery”, which would also help Aussie gold and silver investors (although we doubt the RBA is thinking of us).

Chris Western from Pepperstone summed up the market well this week, stating that “gold is just super relaxed at the moment though and needs a spark … the market sees gold holding a range of 1979 to 1915 (with a 70% level of confidence) over the coming week, and risk reversals (the skew of call to put implied volatility) are perfectly neutral – the gold market needs awaking from its current slumber and either that means a move in the USD and/or deeper relative real rates”

Gold continues to consolidate above a very key long-term support level, so until we either convincingly rally off this level or break through it to the downside, there is very little to indicate near-term direction.

One possible catalyst for a pullback in the metals next week is the chance of a relief rally in the US Dollar, as we can see from the below USD/JPY hourly chart the USD is oversold and looks at risk of a bounce higher next week.
USD JPY hourly chart
Looking further out, analysts are still bullish on gold. ANZ Bank see the gold price reaching $2,300 next year on the back of recovering physical demand. Goldman Sachs agree with ANZ’s $2,300 forecast and also see silver rising to $30 an ounce within 12 months as governments debase their currencies.

We noted last week that Chinese (and wider Asian region) physical demand is low but research firm Metals Focus reports that rising enquiries from Indian retailers and manufacturers points to a significant rebound in gold jewellery consumption over the upcoming 6-month long festive season.

Bloomberg analyst Mike McGlone says that “gold’s bullish run is just beginning” and that while $2,000 is a strong resistance level, and some levelling off in the price is to be expected in a bull market, he pointed to gold’s 2008 to 2011 run and said a “similar-velocity 2.7x advance from this year's low-close near $1,470 points toward $4,000 by 2023”.

TD Securities made a good point we think that “recent price action has revealed that there is a supportive positioning slate in gold, with few weak hands remaining” as gold did not experience a deep pullback on last week's equity market volatility.

On the negative side, Societe Generale are “less constructive on gold as the pandemic dissipates, economies recover, and the overall situation returns to some sort of normalcy” and feel that inflows into gold ETFs are unlikely to continue at the rate they have this past year. Nevertheless, they did increase their forecast for gold prices to average $2,200 an ounce in the first quarter of 2021.

Lloyd Blankfein, former chairman and CEO at Goldman Sachs, has joined the inflation chorus saying that he is generally bullish on commodities and while he didn’t have a firm view on gold, he said that if there was ever a time where gold and silver should play a role in financial markets as a store of value, “it would be now”.

Aussie Banks Being Ghosted

It appears that Aussie banks are now experiencing the modern dating phenomenon of ghosting (suddenly disappearing from someone’s life and avoiding contact).

The Australian Financial Review (AFR) reported that around one in five customers who opted to defer their home loan repayments are no longer responding to calls or emails from their bank.
With 414,430 deferred home loans (worth $167 billion) as at the end of July, that means there are about 80,000 borrowers owing $30 billion who “have decided that their best financial strategy is to avoid having any sort of contact with their bankers”.

The AFR says that this strategy isn’t likely to last, as bankers say that regulators don't want them to let borrowers think their loans can be rolled indefinitely. As the banks get more aggressive on following up on the deferred loans it won’t help the economy.

Asset manager PIMCO said this week that in their stress tests Australian banks did not fare as well as others in the Asia Pacific region.

They noted that Australian non-performing loans had been increasing well before the COVID-19 outbreak and they didn’t think that loan deferrals, stimulus packages and lower interest rates will be “sufficient to adequately offset the negative asset quality impact” to our banks.

Maybe we need to move from debt deferrals to a debt jubilee, as proposed by Australian economist Steve Keen. His plan, which he calls “Quantitative Easing for the public” would involve creating money but instead it would be paid directly into the bank accounts of the public with the requirement that the first use of this money would be to reduce debt and if you didn’t have any debt you could spend the cash as you saw fit.

Keen says that we have to accept that “debt can't be repaid when too much debt has been issued. So we have to reduce private debt and we have to do it now … otherwise there'll be many people who can't pay their rent, as well as people who can't pay their mortgages”.

He says that if we don’t reduce debt via a jubilee then “it's quite possible the payments system will collapse” as “everybody will end up having no money in their bank accounts because that money will be used to pay off debt”.

Smart vs Dumb Money

We have noted in the past that retail investors have been engaging in excessive speculation. DoubleLine Capital CEO Jeffrey Gundlach told CNBC that “retail investor activity is downright terrifying” and that it was a “terrible sign for the condition of the [stock] market”.

Bianco Research pointed to this chart from Deltec Bank & Trust showing that trading in options has outstripped trading in underlying cash equities for the first time on record.
trading options versus equities
At the same time, Bloomberg reported that “some of the world’s wealthiest people have sold more than $3 billion of stakes in their major holdings since August”. We don’t think we need to explain which is the dumb money and which is the smart money

Inflation Indexing for Me but not for Thee

This week we came across an article by J.P. Koning asking why aren’t anti-money laundering regulations adjusted for inflation.

It is not something we had thought about but on consideration it does seem unfair that the $10,000 limit for reporting of cash transactions has not been changed since AUSTRAC came into existence in 1989.

Below we graph that $10,000 limit in terms of how many ounces of gold could be bought for cash before reporting was required.
cash transaction reporting limit in ounces of gold
The impact of inflation means that the real value of the $10,000 limit has been falling, bring smaller and smaller transactions into its net.

We note the inconsistency, or should we say, hypocrisy, that while AUSTRAC doesn’t index the $10,000 limit in the Financial Transaction Reports Act 1988, it defines its fines in terms of penalty units – which were introduced to provide a simple and quick way to adjust fines, fees and charges in legislation for the effects of inflation.

Koning argues that anti-money laundering regulations can be thought of as a trade-off where the public sacrifices a bit of their privacy to help stop money launderers and that the $10,000 threshold “as a compromise between citizens and financial authorities. The level was set high enough that the financial privacy of most citizens would not be invaded”.

By not indexing the cash transaction reporting limit, AUSTRAC is breaking that implicit agreement made back in 1989 between itself and the public.
 
Until next time,

John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at comms@abcbullion.com.au, or call us during trading hours on 1300 361 261.

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