Aussie dollar falls give gold a free ride
23 July 2021
What do we want: A gold rally!
When do we want it: Now!
If you’re based in Australia, we are getting a rally in gold. It just happens to be a gold rally denominated our local currency.
Before we get into what this means for Aussie investors, let’s hear from the trading desk...
Thoughts from the Trading Desk
Today’s thoughts from the trading desk are very much a ‘show and tell’.
Let’s kick off with Nick Frappell’s insights on the US dollar.
Earlier in the year — contrary to broader market opinion — Nick highlighted the strength building in the US dollar. Today he extends on that, writing:
‘The DXY tracks higher within the recent trend channel. The recent weaker-than expected US Jobless data weakened the Dollar, alongside a slight recovery in risk appetite. Dovish statements by the ECB President Christine Lagarde pull in the opposite direction.
Our broad thesis that the US economy is likely to outperform in 2021 helps maintain our friendly stance towards the Dollar. 93.34 is a big number on the upside, and we expect resistance there. Medium-term targets suggest a move to 94.00’
Which by the way, Nick boldly told Twitter he expects the DXY to 94.00. How is that looking? Check out the DXY chart below:
US Dollar Index [DXY]
Source: Bloomberg; Updata
His thesis is continuing to play out.
Moving onto gold, the question is, will the yellow metal stay up?
Unfortunately, it doesn’t look spot gold wants to rally just yet.
After that push higher last week – above US$1,800 and into US$1,830 — we’ve seen the yellow metal dip back down under US$1,800.
I wrote last week a 50% retracement higher from the June low is a good sign. Making this week’s — and possibly next week’s — dip expected.
But, like a game of limbo, how low can it go?
Again, we turn to Nick and his trusty Ichimoku Cloud chart for some short term price forecasting, with Nick noting:
- ‘Short term bearish. The drive back up into the cloud was rejected. But the low US$1,790s are supportive and the 50 % Fibonacci Retracement of 29th June – 15th July gave support.’
- Any selling may see gold reach US$1,782. A brief fall into the US$1,760s can’t be ruled out.
US dollar gold price with Ichimoku Cloud
Source: Bloomberg; Updata
Though, it’s worth mentioning that if we expand our view to a weekly Ichimoku Cloud, we can see the US gold price remains ‘in the cloud’ (below).
Gold’s daily bumps and jumps are noise when you look at the bigger picture for the metal.
US dollar gold price with Ichimoku Cloud
Source: People’s Bank of China; Bloomberg
Based on Nick’s analysis, our ‘two steps forward, one step back’ call from last week looks to hold up.
Further to this, Nick told me earlier in the week that it’s a quiet data week.
The heads of various Federal Reserve Bank branches won’t be saying much with the Federal Open Market Committee (FOMC) scheduled for next week.
Leaving investing with little market moving news.
We’ll check in with Nick next week to see if there’s a data release that’s going to drive the market.
Until then, let’s move onto the good news for Aussie investors…a falling Aussie dollar brings a boost to gold.
Aussie dollar’s roller coaster ride
The US dollar gold price may be struggling to keep its price gains, but the Aussie dollar price is looking the goods.
If the US dollar price of gold is struggling to rise, why is the Aussie dollar price of gold going up?
Simple. The Aussie dollar is falling in value, boosting the value of gold in our currency.
The value of the Aussie dollar and the Aussie dollar gold price often have an inverse relationship.
Let me show you what I mean.
The Aussie dollar gold price (blue line) started to rally in early July. Whereas the Aussie dollar US dollar cross rate [AUD/USD] (orange line) began to fall at the same time:
Aussie dollar fall boost Aussie gold price
Source: Trading View
Another way of looking at it, is those of us who bought gold in Aussie dollars are getting a free ‘rise’ from the Aussie dollar falling faster than the spot price of gold.
While this is great news for those buying bullion, it begs the questions will the Aussie dollar keep falling?
With over 50% of Australia is some sort of lockdown at present, some headlines are pointing to many of us being shut in doors as the reason for the decline. Sure, these lockdowns may be weighing on sentiment towards our currency, but they aren’t responsible for the falls.
This is important to note, as 52.6% of Australia’s gross domestic product (GDP) comes from the buying and selling of things in the economy. Though, this is down from the multi decade average of 56.8%.
Meaning people are spending money, it’s just how they spend that’s interrupted.
It’s not our ability to spend that supports the dollar (it contributes to sentiment of our economy), rather it’s what we have in the ground.
The Aussie dollar has, in the past, had a neat correlation with the value of commodities. It’s not a lock step move, rather our money reflects global demand for our vast resources.
This relationship with commodity prices began to break down in May this year:
CRB Commodity Index vs AUD/USD
This break down was noted by Nick last week. He pointed out the Aussie dollar wasn’t flying when iron ore and other commodities were.
The Aussies’ inability to keep pace with commodities was an indicator there was weakness ahead for our money.
This correlation warrants further investigation beyond rocks and we need to remember how economic activity inside China supports our currency.
As Australia has hitched their economic fortunes to the Middle Kingdom, policy decisions from the Chinese Communist Party (CCP) will cause our currency to wibble and wobble.
China’s voracious consumption of commodities last year kept the Aussie dollar higher. This no doubt softened the pandemic blow to the Middle Kingdom, while keeping our currency tracking higher when measured in US dollars.
The addendum to this, is how Australian mining sector performed during the pandemic. We are the only country in the world to continue mining without any pandemic related interruptions.
Come May 2021, the Aussie dollar struggled to follow the iron ore price higher. Portions of this can be explained by the strength of the US dollar, but large chunks of the Aussie dollar’s decline relate to a ‘softening’ of economic activity inside China.
We got our first glimpse of this last week with the Chinese GDP results. The second half of 2021 is expected to show additional gentle reductions in their GDP numbers as well.
All of which gives us ‘a negative background for the Aussie’, says Nick.
With the Aussie dollar currently trading at 73.81 US cents, we want to know, are we looking for a bounce higher or lower?
According to Nick, the Aussie dollar could struggle to get past 75.15 US cents, but don’t be surprised if you see the cross-rate kiss 71.60 US cents either.
The good news for those of us holding gold in Aussie dollars though, is that this Aussie dollar weakness gives the Aussie gold price a boost.
South African turmoil highlights importance of supply chains
South Africa is currently experiencing its worst riots in years.
On top of the political turmoil, there’s economic discontent among the population, adding fuel to an already unstable environment.
Several mining companies, freight services and one shipping port have declared a force majeure. Telling the market minerals like cobalt and vanadium will experience interruptions.
These events have seen some questions land in my inbox, as what these disruptions mean for the yellow metal. Some have queried why this upheaval isn’t showing in the US dollar gold price.
Simply put South Africa is not longer a major producer of gold.
Along with the days of safari suits and ABBA, South Africa’s dominance in gold mining was left in the 1970s.
Based on output, South Africa is the 11th largest producer of gold in the world. China, Russia and Australia take out first, second and third spot respectively.
Gold production by country
(Click to enlarge)
Source: Metals Focus; World Gold Council
While the unfolding crisis in South Africa won’t impact spot gold, it could have ramifications for other precious metals like platinum. The price of platinum has risen slightly, but for the moment supply of this rare mineral remains steady.
As tragic as these events are, it forces us to start questioning where and how precious metals come to us. Do you know where your gold and silver come from? Tell me here.
Now, before you slip into your weekend, my latest interview with Nick Frappell went live on our YouTube channel at the start of the week. Click on the image below to watch it now.
Until next time,
Group Communications Manager,
For ABC Bullion
PS – Don’t forget, if you’re in Sydney or Melbourne we are open for click and collect only. Please call us on 1300 361 261 to discuss how we can help you with your bullion investments during this time.
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