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Don’t Trust the RBA, Negative Rates are Coming

16 October 2020

Precious Metals Commentary

Gold approaches the end of the week down 1.2% but considering the decent rally in the US dollar it is an acceptable performance. With sideways movement in real rates/treasury inflation-adjusted yields gold has not been able to find any direction from that side so it also continues its sideways movement.
usd gold price chart
ABC Bullion’s Global General Manager and technical analysis guru, Nick Frappell, says that the rallies this week have encountered resistance in and around the Daily cloud, above $1,916.
In the short-term look for gold to extend to the $1,915-1,921 band where resistance is likely, with Aussie gold approaching resistance at $2,705.

Commerzbank believes gold is well-supported and expects the next few weeks to bring a renewed and lasting upswing rather than any noticeable correction, with a chance for it to climb back to $2,000 an ounce.

Nick said that silver halted at the Weekly Turning Line and dropped fairly hard but he thinks that Aussie silver can swing around – down to A$34.30 but with longer term targets to A$34.50-34.80 in place.

The gold:silver ratio touched 75.75 and is now weakening (silver underperforming) back to 80 with targets to 81.75 and beyond so we could expect silver weakness in the short-term.

In the long run the outlook for silver is positive with Goldman Sachs highlighting silver as a buy due to “a few potential upward solar surprises” including continuing US and China solar installations and Biden’s plan to proceed with 500 million new solar panels in the US.

TD Securities are also favourable towards silver, saying that at the current 78 gold:silver ratio “the white metal is very cheap” and expect it to capitalise on a post-COVID industrial recovery in green energy infrastructure, decarbonization, and electrification.

Both Goldman Sachs and TD Securities have targets of US$30 on silver, which would translate to over A$43 if our exchange rate weakens only slightly.

Nick said the Australian dollar was pushed lower partly by the US dollar rally, which was a product of risk-aversion and angst over the deadlocked US stimulus.
Australian exchange rate chart
Other factors driving our dollar are China tensions, increased expectations of Quantitative Easing and lower interest rates following a speech by RBA governor Philip Lowe at the Citi Group annual investment conference. Economists are now forecasting an interest-rate cut of 15 basis points at the next month’s RBA monetary policy meeting.

Nick says that the AUD looking to go to 0.696 and 0.687, which will help push up local prices of gold and silver.

Negative Interest Rates Are Coming

Charlie Jamieson from Jamieson Coote Bonds says that as the RBA has a very poor record adhering to its medium-term monetary policy he “wouldn't trust the RBA in their commentary at all around the potential for a negative rate”.

He notes that not long ago the RBA was saying that the neutral rate of interest was 3.00% and we are now at 0.25%. They also said that they were not going to do quantitative easing but now that is fully operational. As a result, he says the RBA is a “tremendously reactive Central Bank” and have “misled markets with their own commentaries a number of times”.

Whether those failures are due to poor or overly optimistic forecasting by the RBA or a conscious strategy of trying to talk up the economy in an attempt to avoid having to implement those regressive measures, is an open question.

With European banks and the Bank of Japan already at negative rates, and hints from other central banks, negative interest rates are closer than we think.
table of interest rates of various countries
The Reserve Bank of New Zealand has said that negative interest rates were under consideration and recently Assistant Governor Christian Hawkesby was reported as saying that those comments were not “a game of bluff”, with local commercial banks operationally ready to deploy them.

In the UK, The Telegraph reported that the Bank of England had written to banks asking them about their readiness for negative rates, which gives a strong indication that the measure is being considered.

There is a question of how to implement negative interest rates when people can hold physical cash. Increasing interest in digital or crypto-based currencies by central banks may be another indicator that negative rates are seriously being considered.

The European Central Bank has just recently applied for a “digital euro” trademark and is investigating a complete digital version of the Euro. Other central banks are in the testing phase such as Brazil, Russian and China. At this time the RBA Governor has not made any significant statement regarding the creation of a digital Australian currency.

We are certainly in unprecedented times with central banks taking drastic unconventional policies in order to stimulate consumption and growth for the world economy. There are serious implications for the Australian economy if the RBA was to take these more drastic monetary policies.

Should that happen in Australia it will likely mean much larger account keeping fees on transactional accounts, percentage-based charges on large cash balances and the absurdity of paying people to borrow money (if rates go significantly negative).

Negative interest rates have shown over the last few years to be somewhat toxic not just towards banks but especially towards depositors (savers). As they have never been tried on scale and for an extended period of time, negative interest rates are an experiment as we do not know how banks and consumers will react if the cost of borrowing if lowered below 0%.

Loans that pay money creates a massive incentive towards borrowers that could dramatically drive demand for loans to incentivise investment (likely of the malinvestment type), speculation and spending. A global shift of this magnitude would create an unprecedented macro environment.

Never before have we seen such unconventional monetary policies coming from every central bank around the world and it will move the global economy into uncharted waters. Requiring savers to pay the banks to hold their money will disproportionally affect retirees and push savers towards increasing their spending.

With stocks, bonds and properties already extremely overvalued, people will be looking at a safe asset like gold and silver to protect their wealth. Gold becomes quite attractive when interest rates fall and more so if they go negative.

In a negative interest rate environment, zero-yielding gold and silver look attractive in addition to their great insurance (wealth preservation) nature. As we have previously reported, smart money like Ray Dalio, Paul Tudor Jones and Jeffrey Gundlach (lately increasing their allocation to gold), is clearly aware of the (downward) direction that economies are taking.
Holding cash and bonds in such an unstable financial environment could prove to be the wrong move in the years ahead.
Our view is that negative rates will result in pressure to get out of cash and buy hard assets, of which gold and silver are the most liquid and easy to trade. The question however is whether there will be anyone willing to sell such assets for cash which loses money. If a hot potato effect comes into play where people don’t want to hold cash and are looking to offload it as quickly as possible – and is that not the definition of hyperinflation?

Trading the Gold:Silver Ratio

On Wednesday Bron gave a webinar on trading the gold:silver in conjunction with Zadel Property Education. The main presentation starts at 18:14 and only runs for 30 minutes and covered how to use the ratio to decide which (or how much of each) metal to invest in, backtesting 1296 different trigger strategies and things to watch out for.

Zadel have kindly made it available to the public and you can watch it below or click here to watch it in a new window.

Until next time,

Bron Suchecki and David Marchionni
ABC Bullion

If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.

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