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Gold - The Only Real Vote You Have

31 July 2020

Precious Metals Commentary

Gold stopped short of hitting the US$2,000 level this week, topping out at $1,980 before consolidating. Sentiment towards the metal in the short-term is like the kind of behaviour we see when the market needs a breather.

If gold fails to break through $1,980 in the short term, we could have a longer consolidation and a pullback on profit taking which could provide the next entry point for patient investors. All bets are off if we see a move through $2,000 next week as the market will no doubt get excited.
 
gold chart
 
Silver is incredibly volatile at the moment with many clients potentially locking in orders before seeing the metal drop $2 an ounce, whereas some are sitting on healthy profits from earlier in the month. The metal hit a high over US$26.00 this week before pulling back sharply to $22.50.
 
silver chart
 
We note the ratio has dropped to a much more reasonable 80:1. However, our long-term targets in this bull market would see the ratio revert to around 50-60 range eventually. In the short-term there is no denying the market has been a bit overbought and sentiment is at an extremely bullish level, which means we will not be surprised to see some consolidation next week on no price sensitive news.
 
gold silver ratio chart
 
One metal that is not on the radar at all and only making up around 1% of our volumes is platinum. We are starting to see investment demand pick up, and given how much room the market can grow, it is interesting to think about what could happen if platinum starts to be seen as a store of value like gold.

Many investors are looking to alternatives to gold after seeing the price rise dramatically. There is the potential for platinum to be dragged higher with the other metals on the back of a big surge in investment demand. The platinum price is starting to have a relatively strong correlation to silver, and most would be unaware that platinum too is in a technical bull market, up some 55% from the recent March low of USD$580 per ounce.
 
platinum chart

FOMO and FOFF

Mainstream market attitudes towards precious metals from a long-term perspective has appeared to have made a significant and permanent change. This means that any decent dips in the price will likely be bought, with most major investment banks having gold targets well above where we are trading today.

When advice from an investment bank like Goldman Sachs, the most main of the mainstream and white of the white-shoes, starts to look like ABC Bullion’s market updates you know a real shift in attitudes has occurred. Just look at these quotes from a note to their clients on Tuesday:
  • described gold as “the currency of last resort” amid uncertain economic conditions
  • “potential shift in the U.S. Fed towards an inflationary bias”
  • “record level of debt accumulation by the U.S. government”
  • “expanded balance sheets and vast money creation spurs debasement fears”
  • “concerns around the longevity of the U.S. dollar as a reserve currency”
  • “Gold is the currency of last resort”
On the back of those points, Goldman Sachs have increased their price target for gold to $2,300 within the next year on the back of rock bottom interest rates. They have turned even more bullish on silver, forecasting $30.00 per ounce, some 27% higher than current levels.

This week saw gold make headlines across the globe and as we said a few weeks ago, those headlines drive new investor interest creating a positive feedback FOMO loop. At ABC Bullion we have seen the same sort of surge that COVID brought in March and all the dealers we are talking to report the same.

There is no doubt a fear of missing out factor in the demand, but the points Goldman raise (and which we have seen repeatedly made by other analysts in mainstream firms) indicate that it is also a FOFF - fear of fiat failure – that is driving demand for the precious metals.

We think the other factor is that there is a growing realisation that the problems the global financial crisis (GFC) revealed in 2008 have not been fixed.

We believe there is a large number of investors who may not have bought gold or silver in response to the GFC, trusting in governments and central bankers to fix it. However, they have had nagging concerns that not all has been well for years now and COVID has just crystalised those concerns and triggered them into action to protect themselves with the metals.

With the US reporting an annualised fall of 32.9% in its headline real (ie after inflation) Gross Domestic Product (GDP), we think the chart below from Alhambra Investments we think puts into focus the failure of technocrats to get the economy back on track.
 
real GDP chart
 
The point the chart’s creator, Jeffrey Snider, makes is that post-GFC we have not got back on to the track real GDP was trending at for decades (as indicated by the black dotted line).

The gap between the black dotted line and real GDP in blue is a permanent loss the economy has taken, which now reaches $7.5 trillion dollars. Central bank actions just prop up the stock market to the benefit of the limited number of people with assets to appreciate while the poor and middle classes miss out as actual economic output has not turned around.

While we technically live in a democracy and can vote political parties in or out, when both parties believe in the same economic theories and staff the RBA with likeminded bureaucrats, what power does the average person really have to protest against zero or negative interest rates and government handouts?

Moving money between stocks, bond or cash just keeps it in the system. Even buying a hard asset like real estate, which would increase property prices, would be interpreted as a “good thing”.

However, everyone knows that a rising gold price means people are not happy with government or the economic outlook. In a way, buying gold is a vote against the competence of central banks and governments.

When you cannot vote for the heads of central banks, when it comes to preferences on monetary policy, gold, in our opinion, is the only real vote the average person has.
 
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 comms@abcbullion.com.au, 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.