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​Conflicting Views on the Australian Economy

08 March 2019

Gold chart
After dropping more than USD$20 during US hours on Friday, gold has moved sideways this week between USD$1,280 and USD$1,290, with silver falling back to just above USD$15 per ounce. Commentators attribute the weakness to reductions in US recession concerns with the market projecting rate increases on rumors of possible monetary accommodation in China, a U.S.-China trade deal, a rise in the ISM Service-Sector Index and US sales of new homes topping forecasts.

For local investors, the drop in precious metals last Friday was somewhat muted by the AUD/USD slipping lower to 70.2 US cents, which sees gold trading at AUD$1,833 and silver at $21.50 per ounce.

The sharp drop in gold can be seen above on the daily chart, which currently signals oversold levels on the Williams oscillator, indicating a possible short-term recovery. Considering those pressures, gold has performed well to hold above $1,280. Goldman Sachs raised their gold forecast by $25 across the board, seeing gold prices pushing to $1,350 in 3 months and $1,450 in a year, noting that “the negative gold-real rates correlation has re-emerged” and while they see silver’s industrial demand as anemic they are “optimistic that silver will continue to rally in line with gold prices”.

These predictions could be good news for Australian investors if AMP Capital Shane Oliver’s forecast for the Australian dollar of “the high $US0.60s” comes true.

However in the short-term investors may have to endure some seasonal weakness in gold in USD terms before a (US) spring rally.


Gold Bull Spring Rally

Zeal LLC recently looked at gold’s seasonality, which he sees as being “fueled by well-known income-cycle and cultural drivers of outsized gold demand from around the world” starting in late July when Asian farmers plow surplus income into gold, followed by the Indian wedding season, then the Western holiday season and finishing with Chinese New Year gold buying heading into January/February.

He puts all this together into the chart below, which averages yearly indexed prices during the bull-market years of 2001 to 2012 and 2016 to 2018 as “we’re interested in bull-market seasonality, because gold remains in its latest bull today and bear-market action is quite dissimilar”.

Chinese New Year buying chart

He says that “this bull-market-seasonality methodology reveals that gold’s spring rally [i.e. mid-March to June] is its last push higher before the summer [June-July] doldrums arrive”.

Conflicting Views on the Australian Economy

The Reserve Bank of Australia left the cash rate unchanged at 1.50% this week, saying that the “global financial conditions remain accommodative”, the “Australian labour market remains strong” and predicting “the Australian economy to grow by around 3 per cent this year … supported by rising business investment, higher levels of spending on public infrastructure and increased employment”.

While the RBA noted that “the main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling housing prices in some cities”, it does not seem that they are putting much weight on it. Is it a case of the RBA trying to talk up an economy it knows to be in some trouble? Below are reports that came across our virtual desk this week that give cause for concern.

Report 1: investment research firm Variant Perception noted that the “latest housing market data in Australia continues to deteriorate and maintains the very bearish 2019 outlook for the Australian economy and asset markets” due to falling building permits, declining housing finance (particularly interest-only loans) and collapsing auction clearance rates.
Report 1
Report 2: The seasonally adjusted Commonwealth Bank Composite Output Index slipped from 51.3 in January to 49.1 in February. This signals a decline from expansion and reflects “a deterioration in service sector conditions and slower growth in the manufacturing sector”.
Report 2
Report 3: UBS Global Research noted that EPS revisions for the market ex-resources and ex-financials were the weakest since 2010 with “around 17 per cent of Aussie large cap companies downgraded guidance this reporting season as cost pressures weighed on major financial institutions and industrials”.

Report 4: Digital Finance Analytics’ recently estimated “that more than 66,000 households risk 30-day default in the next 12 months, up 3,000 from last month” and “more than 1,036,214 households are estimated to be now in mortgage stress”, which they attributed to flat wages growth, rising living costs and higher real mortgage rates.
Mortage Stress Trends

Report 5: The Australian revealed that “Suncorp has unexpectedly declared a residential mortgage bond worth $120 million may not repay all investors after the share of borrowers in arrears rose to a trigger point, putting the distributions in doubt”. CLSA banking analyst Brian Johnson was quoted as saying that “To get to this point, for a securitisation this old to go bust — that is weird … It certainly is a canary”.

Report 6: Alex Joiner (IFM Economist) tweeted on a story that picked up a lot of attention this week, noting that “Australia officially enters a "per capita" GDP recession, the first since 2006. We are clearly too reliant on population growth to support economic activity. Australian productivity growth, measured by GDP per hour worked, has posted quarterly declines in 8 out of the last 10 quarters, weighing on economic growth and wages growth alike - the RBA can't fix this with rates”.
GDP growth per capita 
That is probably enough reports to paint a less than rosy picture, one that Dr Shane Oliver, Chief Economist AMP Capital, is painting as well. He sees the housing downturn resulting in a “negative wealth effect on consumer spending of around 1-1.2% pa” and unlike the RBA, thinks economic growth will be around 2-2.5%, which will result in unemployment rising to around 5.5% by year end.

His prediction is for the RBA to cut the cash rate to 1% and the market appears to agree:

However, Shane says that the cuts “won’t be aimed at reinflating the property market but supporting households with a mortgage to offset the negative wealth effect”. Lower Australian interest rates combined with an expectation that the Fed will keep rates on hold is behind his prediction that “the $A is likely to fall into the high $US0.60s”.

One final quote to finish off these developments in Australia comes from Matt Barrie, CEO of, as quoted in the AFR on Sunday. Normally CEOs, and especially entrepreneurs, tend to the optimistic side, so we find his pessimistic comments of particularly noteworthy. Is there something in the Freelancer users statistics that is causing Matt to conclude that:

"It's low growth everywhere. It's questionable if we ever exited the GFC. In Australia every indicator is blinking red. It's a house of cards. We're highly dependent on China (we're on par with the Congo for how reliant we are) and they are in a trade war. We have the housing market falling off a cliff … royal commission will be a catalyst for the collapse of the Australian housing market, with the other catalyst being China coming off the boil and regulations to stop the flow of capital out of China. … I worry the next government will launch populist policies and we'll be on the way to being the next Argentina."

Gold Keeping Up with Inflation

The cost information website How Much put out a chart showing 20 years of price changes of selected consumer goods and services in the US compared to average earnings. Some items have fallen in price but many were above earnings, raising the question of how can you protect yourself against such inflation.
We’d suggest looking at gold. Below we have superimposed the How Much chart against the USD gold price. Do excuse the squeezed How Much chart, but that just shows how well gold has done in keeping up with consumer prices.
USD Gold Price

JP Morgan agrees, saying in a recent report that “gold remain the “most durable” hedges in an environment of rising inflation” given that the Federal Reserve “will deliberately erode real yields to spur the economy, thus undermining the dollar versus alternative reserve currencies like Gold”.

Until next time,
ABC Bullion
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.