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Down Under Under-Employed

17 May 2019

Precious Metals Commentary


Precious metals had an up and down week this week with gold in USD trading back above $1,300 ever so briefly, before consolidating just above $1,280 per ounce. Silver slightly lower at $14.50 per ounce.

With the AUD/USD continuing to knock out fresh lows below 0.69c we see gold in AUD continuing towards all time highs. They say “the trend is your friend” and with little to no catalysts on the horizon to spark any AUD buying, we expect the trend to remain friendly for gold bulls here domestically.
 
Gold Price AUD 

For those thinking they’ve missed the boat, dollar cost averaging can provide a good solution, or potentially take a look at silver at a much more conservative AUD$21.15, with the Gold:Silver ratio near 20 year highs of 87.23. We expect reversion to the mean to happen eventually, but aren’t going to try to guess when.

Bitcoin has been generating some buzz of late, but if you can’t come up with a reason as to why prices are rising, try researching the current articles on Bitfinex and the highly dubious Tether.

Recent pops in Bitcoin have been short lived and largely based on Tether liquidation into Bitcoin that then gets moved off exchanges. Bloomberg covers this in a recent article here.

We wouldn’t be buying into the narrative that this is new investor funds, as we have seen net withdrawals from major exchanges during the rally.
 
Bitcoin/ U.S. Dollar
*** Updated chart 1.40pm Friday
Between the time we wrote the above and the time of posting this weeks market update Bitcoin has since flash crashed to USD$6,000 before recovering to $7,200. In summary, the below chart is clearly not an example of a reliable store of value and highlights the fragile nature of the crypto market.

Bitcoin 
 

Trade War Hots Up


The trade war got a little hotter this week with China retaliating to US moves to hike duties on Chinese goods by raising tariffs on $60 billion worth of US goods. Tariffs are to be increased 25% or 20%, up from previous rates of either 10% or 5%. With a large part of those tariffs targeting commodities and thereby putting pressure on US famers, a core constituency for President Trump, China is clearly aiming to increase domestic political heat for Trump. That didn’t seem to have an effect with a Presidential executive order that paves the way for a ban on Chinese consumer technology adding to the tension.

Shane Oliver (AMP Capital) notes that if the US taxes all imports from China at 25% it “could add around 0.2% to core inflation and detract up to 0.75% from US GDP” as the new tariffs shift the impact to consumer goods.

There is a risk this could push the US into a recession as US retail sales continue to be weak, falling 0.2% in April (when the market was expecting 0.2%) and averaging zero over the past six months. With US consumers making up around 70% of GDP weak retail sales are negative for the US dollar, which should help support gold.

Trade war uncertainty will continue to impact on markets and increase volatility for some time, with President Trump indicating a timeframe of three or four weeks, being expected to meet with the Chinese president in June. In addition to trade tensions, gold should get support from other geopolitical stresses such as the drone attacks on a Saudi pipeline, the attack on oil tankers in the Persian Gulf, and revelations that the US had updated plans to send 120,000 troops to the Middle East should Iran attack American forces.

None of this is good for international trade, with ZeroHedge noting the year-over-year change in global trade has completely collapsed and is now at levels last seen in the financial crisis.

Globar Trade YoY 

Despite the chart above indicating the worst global trade conditions since the GFC, global stock markets continue to trade at expensive valuations, as investors (particularly in the US) seem to shake off bad news and continue to buy dips in the S&P500.

Advisory firm Merk Investments confirms the poor outlook, with Purchasing Manager Indexes (PMI’s) for major economies continuing year-long declines. The chart below shows the worsening PMI’s with the S&P500 bucking the trend for now, remaining at elevated levels. We don’t expect this to last forever, as the poor global growth outlook will surely feed through to earnings eventually.

Global Growth Backdrop
The stock market gains this year are in complete contrast to the negative state of manufacturing as indicated by the indexes. If PMIs do not improve, we expect the S&P to play catch-up to the downside.

The chart below from that Merk Investments report shows the precarious position the stock market is in. 

S&P 500

The grey dotted line is an estimate of the percentage of investments allocated to stocks (value of stocks divided by stocks plus debt). At 41%, it is relatively high. The black line is stock market returns (without dividends) over the next ten years. Notwithstanding the usual disclaimer about “past returns should not be taken as a prediction of likely future returns”, a very strong correlation like that going back more than 60 years shouldn’t be ignored. Based on that, Merk says “this chart suggests annualized S&P 500 returns (w/o dividends) might be in the low single digits annualized over the coming 10 year period”. It would certainly fit our overall view that moving forward it is going to be a much harder environment to invest than the previous 30 years as the easy gains in stocks and property are likely behind us. 

 

Australian Unemployment & Under-Employment


Australian employment statistics for April were released this week, with employment up 28,400 and unemployment rate of 5.2%. These contrast with Roy Morgan’s estimates, which has unemployment at 8.9% and 8.8% of the workforce as under-employed.
 
Unemployment chart
Roy Morgan classifies a person as unemployed if they are looking for work, no matter when and are not seasonally adjusted. The ABS has a different definition, where a person has to have been actively looking for work in the four weeks up to the end of the reference week and they were available for work in the reference week.

Putting the figure together, Roy Morgan says that 2,381,000 Australians (17.7% of the workforce) are either unemployed or under-employed.

No surprise then to see Digital Finance Analytics’ April household confidence index declining again.
 
Household confidence index declining

The National Australia Bank April Australian Business Confidence report is not pointing to an improvement, with Business Insider reporting that “firms have turned negative on hiring, adding to risks that unemployment may begin to increase in the months ahead”.
Australian Business Confidence chart

We noted last week that low interest rates don’t give much room for central bankers to deal with recessions. Christopher Joye (Coolabah Capital Investments) believes that the RBA has plenty of ammunition to deal with any tumble in the economy as they could “embark on Aussie quantitative easing in the form of buying both long-dated government bonds and portfolios of asset-backed securities (ABS) and residential mortgage-backed securities (RMBS)”.

Doing this would lower home loan rates as it reduces the cost of capital for banks, which Christopher says would end “the great Aussie housing correction”. But as we know, if the RBA indeed does take on QE in the future this will be at the expense of the currency, and one could expect the AUD to be near obliterated in that environment with those prudent enough to save money forced to take one for the team.
 


De-Dollarisation


The South China Morning Post reports that the trade war is behind moves by the ten members of the Association of Southeast Asian Nations plus China, Japan, and South Korea to add Chinese and Japanese currencies to the Chiang Mai Initiative Multilateralisation (CMIM) scheme, which is a “safety net that provides US dollar support to any one of the countries in the event of a liquidity crisis”.

While the US dollar’s 63% share of global reserve means it is still the key reserve currency, this move is another sign that countries are moving away from the US dollar.

China bought gold again in April, for the fifth month in a row, after a break of two years. Timothy Fogarty, former senior vice president at the New York Fed, said to Kitco News that China’s move was about diversification and not de-dollarisation, noting that their 1,900 tonnes gold reserves were less than 3% of their total reserves, which includes about $3 trillion in US government debt.

Russia has also been accelerating the amount of gold it adds to its reserves since 2014 but Fogarty said that “Russia’s motivations behind its gold reserves are a little more political”, having sold a significant portion of its US dollar and Treasuries.

While we are on the topic of central bank gold accumulation, this month is the 20 year anniversary of “one of the worst investment decisions of all time”, as the BBC reports regarding the sale of 401 tonnes of British gold reserves at an average price of $275 an ounce. It was the in thing for central bankers to do at the time and followed Australia’s sale of 160 tonnes. At this time, there doesn’t seem to be any risk of either country selling of the remainder of their gold, which is good, but we’d much prefer the RBA to Make Australia Gold Again. Note to Philip Lowe: ABC Bullion would be willing to consider offering a bulk purchase discount (bar premium only).

 
Until next time,
 
John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and 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.

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.