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Dollar Rally Hits Gold, AUD Sinking, Rickards in Sydney

02 November 2017

It’s been a tough few weeks for precious metals bulls, with the price of gold declining to USD $1,275oz, now down nearly 6% from the levels it was trading at in early September. It has been a similarly tough run for silver, which was trading above USD $18oz barely two months ago, but is currently sitting at just USD $17.20oz, with a substantial overnight rally limiting the decline.
 
A rally in the US dollar, which had been falling for most of the year, has been a major factor pulling gold lower, as has the continued run of all time highs in global stock markets, whilst expectations of a December rate hike by the US Federal Reserve are also pressuring bullion.
 
Unsurprisingly, the weakness in bullion has led to some minor ETF outflows, and a trimming of speculative long positions from non-commercial speculators in the gold space, who had aggressively been adding to longs as the market surged beyond USD $1,300oz a couple of months ago.
 
Finally, gold prices are also no doubt suffering from the ‘Bitcoin’ effect, with the skyrocketing price of the cleverly marketed ‘digital gold’ no doubt stealing some market share from those looking to incorporate non-state run fiat currencies into their portfolio.
 
Australian dollar investors have been cushioned from the recent falls, with the local currency under significant pressure in the last two to three weeks. Fears of a slow down in the Australian economy, driven by poor retail sales data, non-existent wage growth and a now apparent cooling in East Coast housing markets have seen markets re-price the chance of any RBA rate hikes, and it remains our view that we will still see rate cuts in 2018. Iron ore prices also continue to soften, now trading below USD $60 a tonne, down the better part of 25% since late August.
 
Add all this up and it’s no surprise the AUD has been under pressure, falling from close to USD $0.81 in early September all the way down to USD $0.765 today, with gold in the local currency holding the AUD $1,650oz level, whilst silver is trading just above AUD $22oz. 
 
What happens next?
 
Unsurprisingly, there is no real consensus as to where the gold price heads next. According to this article in Kitco, analysts at Bank of America Merril Lynch see higher bond yields and a continued rally in the USD weighing on gold. They have downgrade their expectations on the gold price, now seeing the metal averaging just USD $1,250oz in the first three months of 2018, a significant reduction from their previous estimate, where they saw the yellow metal trading over 10% higher, at USD $1,400oz. 

ABN Amro are more optimistic, expecting the gold price to rebound toward USD $1300oz by the end of this year, before pushing on to USD $1,450oz in 2018.
 
Clive Maund, an analyst whose we work read regularly, also had a good update on the gold (and USD) market. His article looks at a range of factors, including the performance of gold miners (see chart below which was sourced from his article) as a potential lead for the gold price itself, with the potential for some more short-term weakness before gold finds a firmer base and heads higher. 

As for how much further that short-term weakness has to run, it would be impossible to rule out a pullback as low as USD $1200-USD $1215 area, especially if the USD index powers on toward the 97 range, which the following chart suggests is highly possible. 

From our perspective, we do see a chance that a test of the lower USD $1200oz range is possible, especially as COT positioning suggests further unwinding of speculative positioning is possible.
 
Net non-commericial longs have declined for 5 out of the last 6 weeks, and are now sitting at 191,000 contracts. This is in line with a year ago, but still well up on where they were at the end of July.
 
Clearly some of the excess has been cleared out of the market, but we are not yet near a level of positioning that one could take as a ‘green light’ for a market bottom.
 
In saying that, a range of technical indicators including RSI and MACD suggest the USD $1,260oz level may well be the bottom for this move. This is made clear on the following chart (thanks to @JohnFeeney10 for creating it), which shows USD gold over the last several months.


As you can see, RSI and MACD are at reading levels typically associated with bottoms in the gold price, and the market is also well supported above the all important 200 day moving average, which currently sits at around USD $1,260oz.
 
With the AUD under pressure, it is likely that local currency gold prices are likely to be well supported at current levels, regardless of whether USD gold declines toward the USD $1,200oz level.
 
As such, any buyers entering the market or adding to their holdings between AUD $1,600oz and AUD $1,700oz will be well rewarded provided they have a medium to long term view (3 years plus).
 
Chinese Gold Market Update!
 
There are two quick updates from China that are worth sharing this week. The first of those is that the Shanghai Gold Exchange (SGE) this week marks its 15th anniversary, having opened for business back in October 2002. 

The exchange has obviously played and continues to play a key role in the Chinese gold market, with the increased demand from Eastern markets one of the key underpinnings of the impressive performance of gold in all major currencies over the 15 year period the SGE has been in operation.
 
Secondly, according to this article over at goldseek.com, the latest data from GFMS suggests Chinese gold mining output fell by 10% between 1H 2016 and 1H 2017.

As readers of ABC Bullion market updates will know, we think annual mine production is largely a non-event when it comes to gold prices, as gold’s stock to flow ratio and inviolably stable overall supply means the gold price is almost exclusively demand driven.
 
Nevertheless, this latest data from China serves as a useful reminder of the scarcity of gold and its overall stability, critical factors that underpin its status as humanities most important and enduring store of wealth.
 
A Warning on Markets
 
For those of you who are interested in developments in broader financial markets, we thought you might appreciate a read of this article, which appeared in CuffeLinks (a website we contribute too on occasion).

Titled “Five Warnings about the most hated bull market in history” it has some great charts highlighting risk in stock markets today, including the one included here, which divides forward p/e ratios by volatility. 


As the article states; “This measure demonstrates the mix of high values and risk complacency. Any ratio which is at an all-time high and over three standard deviations away from its mean since 1990 is a warning that the markets face a correction at some time. The problem facing all investors is knowing when to leave the dance party. The year before the market crash of 1987, the Dow Jones added 37%.”
 
There are some other great highlights, including record levels of optimism across all classes of investors, the share of risk-parity portfolios which are currently allocated to equities, and the complete absence of any meaningful corrections in equity markets.
 
It’s worth a look.
 
In the interests of balance, CuffeLinks also had a more bullish article looking at share markets, which discussed better growth indicators, low official inflation and unemployment levels the world over, and improving corporate profitability.
 
You can access that article here

Jim Rickards joins ABC Bullion at Custodian Vaults
 
Finally, we couldn’t finish this market update without mentioning our recent interview with Jim Rickards, who was kind enough to come past Custodian Vaults in Sydney this week, for a chat on all things precious metals (and horse racing) related. 


We’ll have the interview available for you early next week – make sure you don’t miss it.
 
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.