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Create AccountBitcoin Breaks as Sovereign Wealth Funds go for Gold
02 February 2018
Gold and silver had a steady end to January 2018, closing out the month with an increase of 4% (gold) and 2% (silver) in USD terms. For local investors, returns were constrained, owing to a rally in the AUD, which closed the month comfortably above USD $0.80.
Other asset classes have hogged the headlines though, with equity markets rallying strongly, so much so that a now record number of Americans expect to see rising stock prices over the next 12 months. Whilst risk is flying higher, bonds, Bitcoin and the US dollar have all sold off violently to start the year.
Short term, we wouldn’t be surprised to see gold pullback, especially as the US dollar is overdue some kind of bounce. Managed money has continued to extend long positions in gold for most of this price rally, whilst other technical indicators and sentiment indices also suggest the yellow metal could pull back, with targets around the USD $1320oz level, and significant support near USD $1300oz.
The fact that gold is yet to break out against foreign currencies also suggests a large part of this recent gold rally can merely be put down to USD weakness, highlighting the importance of the greenback to gold price moves.
The report had a number of key takeaways, highlighting the fact that Sovereign Wealth Funds (SWFs) now control some USD $7.4 trillion in investment assets, and that these funds have allocated nearly 25% of their portfolios to alternative assets, which include investments like hedge funds, private equity, real estate and other real assets, including gold.
The report highlights many of the positive attributes that gold can bring to a portfolio, noting that gold alone, unlike most alternative assets like hedge funds and private equity, is a highly liquid asset that is easy to buy and sell, with over USD $200bn of turnover a day in global precious metal markets.
Gold is also a homogenous asset, making it a simpler investment than hedge funds, private equity and other real assets, whilst it has also outperformed both bonds and stocks over a 10 and 20 year timeframe, as per the chart below.
These features, along with the low correlation between gold and traditional asset classes, plus its resilience during periods of financial market instability make it a valuable addition to sovereign wealth funds, with the report noting that all of these features combined mean that; “gold as an investment class can offer reliable support, not only during uncertain market and political conditions, such as periods of high inflation, stock market crashes, and geopolitical instability, but also under normal market conditions. The investment case for gold, during periods of market uncertainty, has proven to be strong, with the price of gold having surged rapidly and having countered the negative effects of adverse market conditions. Hence, investors can consider gold for diversification and long-term performance."
The report also noted that SWFs focused on capital maximisation could benefit from a gold allocation given the long-term growth in the gold price.
There are a lot of valuable insights that the entire investment community, from pension funds and Australian superannuation funds, to self directed investors including SMSF trustees, can gain from reading this report, and the benefits gold brings to a portfolio.
For me personally – the two key takeaways are simplicity and liquidity. Simplicity in investing is a virtue. There will almost certainly be some private equity managers and hedge funds that outperform gold in the coming years, but identifying which ones is no easy feat.
Their investments may also be opaque and illiquid, whilst their fee structures are also likely to be high. Gold on the other hand will always be incredibly easy to buy and sell, highly liquid, and relatively cheap to buy/sell and store.
Those asset class virtues are likely to find increasing favour in the years ahead.
The report can be accessed in full at this link.
On top of this, news broke this week that the US Commodity Futures Trading Commission has subpoenaed cryptocurrency exchange Bitfinex and Tether. It also looks like Tethers relationship with its auditing firm Friedman LLC has come to an end, increasing investor concerns regarding the Tether USDT token, which the company claims is backed 1-to-1 with the US dollar, though many market participants are skeptical of this claim.
The Securities and Exchange Commission also announced that an asset freeze for AriseBank, who had supposedly raised some $600 million through sales of new digital coins.
Add it all up and investors are getting ever more concerned about just what it is they are investing in when they buy into the cryptocurrency space, with the wild-west nature of the crypto-market encouraging many to head for the exits.
This has led to yet another significant sell off in Bitcoin and in the crypto-space more generally, with Bitcoin falling well USD $9,000 at one point in the last 24 hours, though it seems to have to bounced back above that level for now.
The chart, which you can see below, should act as a warning sign for investors attracted to this space. Bitcoin has already gone through drawdowns of close to 80%.
A similar move this time would see the market fall well below USD $5,000 a coin, no doubt causing a substantial panic amongst those who piled into Bitcoin in the last few months of 2017. From a technical point of view, there are clear downside targets at both USD $7750 and then USD $6,500, so anyone tempted to buy the dip may wish to hold fire for some time yet.
Whilst these are hardly disastrous falls, they do fall well short of the soaring property prices that Australians on the eastern seaboard had come to expect in the last few years. They also put an end to the ‘wealth effect’ that comes from rising property values, which to one degree or another, has supported consumer spending in recent times.
Alarm bells on the state of the housing market continue to ring, especially the East Coast apartment market, whilst building approvals were down 5.5% year on year in December, driven by a mammoth 18.4% fall in apartment and unit approvals. Private sector housing approvals held up better, but it’s clear that overall, the Australian housing market slowed significantly in the back half of 2017.
Based on credit growth data, there is little reason to expect this weakness in the housing market to end anytime soon. As you can see from the chart below (which comes from an excellent website called datadigger which is a go to source for Australian financial market and economic data), credit growth across the economy is weak.
On the inflation front, official CPI increases are still soft, coming in at just 1.9%, below the RBA’s target band, which is yet another reason why we can’t see the RBA hiking interest rates this year, as many market commentators expect.
Long-term readers of these publications will know I think official CPI does a poor job representing real cost of living pressures Australian’s face, with official CPI increases running at less than half of what Australians themselves expect inflation to be, based on Roy Morgan research.
Be that as it may, it is the official figures the RBA and most of the market will pay attention too, and when digging into them, there is little to suggest there is much inflation on the way at all, especially with an Australian dollar above USD $0.80, which helps to contain tradable inflation.
Indeed, according to some interesting research from Deutsche Bank, had it not been from what they call the ‘fast five’ (petrol, health, education, tobacco and utilities), then year on year inflation in Australia would have been just 0.6%.
The evolution of official CPI increases over the past six years, excluding these ‘fast five’ items, is seen in the chart below, with an article on this subject available via Business Insider.
The key takeaway from this is that if price rises from any of these areas begin to subside, then overall official inflation will be almost non-existent. Given record levels of household debt, record low wage growth, an Australian dollar that sits above USD $0.80 and a now declining housing market, we find it almost impossible to see how the RBA can hike rates. As a result, savers in cash will continue to be punished, forcing investors to take on risk in other asset classes.
More than most, precious metals stand to benefit as this trend develops.
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.
Other asset classes have hogged the headlines though, with equity markets rallying strongly, so much so that a now record number of Americans expect to see rising stock prices over the next 12 months. Whilst risk is flying higher, bonds, Bitcoin and the US dollar have all sold off violently to start the year.
Short term, we wouldn’t be surprised to see gold pullback, especially as the US dollar is overdue some kind of bounce. Managed money has continued to extend long positions in gold for most of this price rally, whilst other technical indicators and sentiment indices also suggest the yellow metal could pull back, with targets around the USD $1320oz level, and significant support near USD $1300oz.
The fact that gold is yet to break out against foreign currencies also suggests a large part of this recent gold rally can merely be put down to USD weakness, highlighting the importance of the greenback to gold price moves.
Sovereign Wealth Funds go for Gold
The World Gold Council, in conjunction with PwC, recently released a report that was titled: “The rising attractiveness of alternative asset classes for Sovereign Wealth Funds”.The report had a number of key takeaways, highlighting the fact that Sovereign Wealth Funds (SWFs) now control some USD $7.4 trillion in investment assets, and that these funds have allocated nearly 25% of their portfolios to alternative assets, which include investments like hedge funds, private equity, real estate and other real assets, including gold.
The report highlights many of the positive attributes that gold can bring to a portfolio, noting that gold alone, unlike most alternative assets like hedge funds and private equity, is a highly liquid asset that is easy to buy and sell, with over USD $200bn of turnover a day in global precious metal markets.
Gold is also a homogenous asset, making it a simpler investment than hedge funds, private equity and other real assets, whilst it has also outperformed both bonds and stocks over a 10 and 20 year timeframe, as per the chart below.
These features, along with the low correlation between gold and traditional asset classes, plus its resilience during periods of financial market instability make it a valuable addition to sovereign wealth funds, with the report noting that all of these features combined mean that; “gold as an investment class can offer reliable support, not only during uncertain market and political conditions, such as periods of high inflation, stock market crashes, and geopolitical instability, but also under normal market conditions. The investment case for gold, during periods of market uncertainty, has proven to be strong, with the price of gold having surged rapidly and having countered the negative effects of adverse market conditions. Hence, investors can consider gold for diversification and long-term performance."
The report also noted that SWFs focused on capital maximisation could benefit from a gold allocation given the long-term growth in the gold price.
There are a lot of valuable insights that the entire investment community, from pension funds and Australian superannuation funds, to self directed investors including SMSF trustees, can gain from reading this report, and the benefits gold brings to a portfolio.
For me personally – the two key takeaways are simplicity and liquidity. Simplicity in investing is a virtue. There will almost certainly be some private equity managers and hedge funds that outperform gold in the coming years, but identifying which ones is no easy feat.
Their investments may also be opaque and illiquid, whilst their fee structures are also likely to be high. Gold on the other hand will always be incredibly easy to buy and sell, highly liquid, and relatively cheap to buy/sell and store.
Those asset class virtues are likely to find increasing favour in the years ahead.
The report can be accessed in full at this link.
Bitcoin Falls Again!
One of the more interesting stories of this week was the news that Facebook has, amongst other things, decided to ban all advertising for Bitcoin and cryptocurrencies, as the company believes the sector has become populated by people advertising “financial products and services frequently associated with misleading or deceptive promotional practices”.On top of this, news broke this week that the US Commodity Futures Trading Commission has subpoenaed cryptocurrency exchange Bitfinex and Tether. It also looks like Tethers relationship with its auditing firm Friedman LLC has come to an end, increasing investor concerns regarding the Tether USDT token, which the company claims is backed 1-to-1 with the US dollar, though many market participants are skeptical of this claim.
The Securities and Exchange Commission also announced that an asset freeze for AriseBank, who had supposedly raised some $600 million through sales of new digital coins.
Add it all up and investors are getting ever more concerned about just what it is they are investing in when they buy into the cryptocurrency space, with the wild-west nature of the crypto-market encouraging many to head for the exits.
This has led to yet another significant sell off in Bitcoin and in the crypto-space more generally, with Bitcoin falling well USD $9,000 at one point in the last 24 hours, though it seems to have to bounced back above that level for now.
The chart, which you can see below, should act as a warning sign for investors attracted to this space. Bitcoin has already gone through drawdowns of close to 80%.
A similar move this time would see the market fall well below USD $5,000 a coin, no doubt causing a substantial panic amongst those who piled into Bitcoin in the last few months of 2017. From a technical point of view, there are clear downside targets at both USD $7750 and then USD $6,500, so anyone tempted to buy the dip may wish to hold fire for some time yet.
Australian Housing Market and Inflation Data
It’s been a soft start to the new year for Australian property investors, with the latest results from CoreLogic showing a nationwide fall in property prices of 0.47%, led by Sydney, where prices in the harbour city fell by 0.86%. Over the 3 months to January, Sydney property prices are now down 2.5%, with year on year growth across the nation now essentially flat.Whilst these are hardly disastrous falls, they do fall well short of the soaring property prices that Australians on the eastern seaboard had come to expect in the last few years. They also put an end to the ‘wealth effect’ that comes from rising property values, which to one degree or another, has supported consumer spending in recent times.
Alarm bells on the state of the housing market continue to ring, especially the East Coast apartment market, whilst building approvals were down 5.5% year on year in December, driven by a mammoth 18.4% fall in apartment and unit approvals. Private sector housing approvals held up better, but it’s clear that overall, the Australian housing market slowed significantly in the back half of 2017.
Based on credit growth data, there is little reason to expect this weakness in the housing market to end anytime soon. As you can see from the chart below (which comes from an excellent website called datadigger which is a go to source for Australian financial market and economic data), credit growth across the economy is weak.
On the inflation front, official CPI increases are still soft, coming in at just 1.9%, below the RBA’s target band, which is yet another reason why we can’t see the RBA hiking interest rates this year, as many market commentators expect.
Long-term readers of these publications will know I think official CPI does a poor job representing real cost of living pressures Australian’s face, with official CPI increases running at less than half of what Australians themselves expect inflation to be, based on Roy Morgan research.
Be that as it may, it is the official figures the RBA and most of the market will pay attention too, and when digging into them, there is little to suggest there is much inflation on the way at all, especially with an Australian dollar above USD $0.80, which helps to contain tradable inflation.
Indeed, according to some interesting research from Deutsche Bank, had it not been from what they call the ‘fast five’ (petrol, health, education, tobacco and utilities), then year on year inflation in Australia would have been just 0.6%.
The evolution of official CPI increases over the past six years, excluding these ‘fast five’ items, is seen in the chart below, with an article on this subject available via Business Insider.
The key takeaway from this is that if price rises from any of these areas begin to subside, then overall official inflation will be almost non-existent. Given record levels of household debt, record low wage growth, an Australian dollar that sits above USD $0.80 and a now declining housing market, we find it almost impossible to see how the RBA can hike rates. As a result, savers in cash will continue to be punished, forcing investors to take on risk in other asset classes.
More than most, precious metals stand to benefit as this trend develops.
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.
