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Gold Clears $1,700 As QE Returns

17 April 2020

Precious Metals Commentary

Gold has had a strong week, reaching a high of $1,747 and holding above $1,700 as we write. The move in the 1700s brings gold into the range it lasted traded post the 2011 bubble top.

Gold Spot/USD Chart

While some consolidation should be expected, and thus we would not be surprised to see it trade back under $1,700, the fact that gold has reached this level will encourage talk of when (not if) it will surpass its previous $1,920 highs.

It was only just two months ago when we reported on the annual London Bullion Market Association (LBMA) price forecast competition and characterised Ross Norman’s call for gold to reach a high of $2,080 as “sticking his neck out”.

That call is becoming more reasonable by the day with other market analysts continually revising their forecasts up. Commerzbank is the latest, seeing $1,800 gold prices by the end of this year as investors seek a “last-resort lifeline”.

UBS also sees gold averaging $1,800 for 2020 (which implies prices to hold above that for many months during 2020) but says that silver has upside and “is well positioned to benefit from catch-up trades”. As we’ve said, silver will increasing gain attention as the value play and Kitco picking up on our call on silver from last week, headlining it as “Bottom in silver: 2020 is the best buying opportunity”, is an example of how that story is finding receptive ears.

Silver consolidated this week, reaching $15.85 and currently trading around the $15.40 level and holding up with gold, with the gold:silver ratio stable around 110.

The Australian dollar has traded within a 1.8 cent range this week of 0.6264 to 0.6444 which saw the AUD gold price chop around $50 above and below the $2,700 level and silver between $23.80 and $24.75.
 

The Great Lockdown

Economic statistics continue to decline as coronavirus lockdowns continue. US retail sales fell 8.7%, the New York manufacturing index dropped by a record 56 points and March industrial production fell 5.4%.

Another 5.2 million Americans filed for unemployment benefits in latest week bringing the total since the US went into lockdown to 20 million.

The International Monetary Fund (IMF) says that global growth will drop 6.3 percentage points in 2020 to fall to -3%, which “makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis”.

Roy Morgan reported that unemployment in Australia jumped by 1.4 million in the second half of March to bring the total unemployed or under-employed figure to 3.92 million or an incredible 27.4% of the workforce.

Roy Morgan Unemployment & Under-employement Chart
With those figures it should not be surprising that major US banks have dramatically increased their provisions for loan defaults or delinquencies, coming out to near $27 billion.

Loan Loss Provisions Chart
In Australia the banks appear to be getting ahead of the (default) curve, with the Australian Financial Review reporting that our banks are “shutting the door on borrowers in virus-hit industries” like airlines, tourism, hospitality and retail, particularly for self-employed and casual workers, by tightening lending standards in response to the pandemic downturn.

At the same time, the Australian Prudential Regulation Authority has ordered banks to materially reduce or suspend dividend payments, which the Australian Shareholders Association says will have a big impact on a million retirees who rely on bank dividends for income.

With the Grattan Institute saying that half of working households have only 5.6 weeks’ income or less in the bank, cuts in dividends in addition to the basically zero interest on bank deposits place many in unreasonable stress.

Half of working household have less than $7,000 in the bank chart
It explains why governments around the world and here in Australia have resorted to historic stimulus measures and an effective suspension of market forces by going down the Japan path with more central banks engaging in quantitative easing (QE) by expanding their buying of financial assets beyond government bonds.

AMP Capital’s Chief Economist, Shane Oliver, says that “low interest rates and easy monetary policy will likely be with us for a long time to come” as it will take time to recover from the shutdown when we come out of it. As a result, he feels that using money printing to finance government spending is justified in the current circumstances.

While noting the risk of politicians “becoming addicted to the flow of central bank money resulting in wasteful government spending and eventually hyperinflation” he doesn’t think it will happen as “central banks & governments are wary of doing this”.

We aren’t so trusting and it seems like a lot of investors are also wary.
 

Bank Run Mark II

Back in late 2008 during the Global Financial Crisis, there was a building run on Australia’s banks - as The Australian reported in 2010:

"It was a silent run, unnoticed by the media. Across the country, at least tens and possibly hundreds of thousands of depositors were withdrawing their funds. Left unchecked, there would soon be queues in the street with police managing crowd control."

The $250,000 bank deposit guarantee stopped that turning into a full-on bank run. With the negative economic stories we reported on above weighing upon investor minds, it seems that a similar run to withdraw cash is happening this time around.

The RBA reported in its Financial Stability Review that “withdrawals of cash from banks were elevated over the second half of March” and “included a small number of customers making very large withdrawals (more than $100,000, and in some cases into the millions of dollars)”.

Around that time we did hear reports from a few of our clients that when they went to withdraw cash their banks had limited them to $5,000 and they had to come back later. The RBA said that the elevated demand for cash has since abated but at ABC Bullion we continue to see increased demand for gold and silver.

Investors aren’t just switching from cash to gold but also from cryptos to gold. Crypto bill payment platform Living Room of Satoshi reported that ABC Bullion was currently their top biller.

Top 100 Billers Chart
ABC Bullion has been accepting bitcoin for gold and silver since 2018 via Bitpay (see here for details). Living Room of Satoshi’s chart below shows how investment in precious metals is outstripping shares and other day-to-day expenses.

Bills Paid by Average Amount Chart
In this environment we are not surprised to see this shift to gold and silver as they are a simple and easy way to protect wealth with an asset that is outside the financial system.

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 article has been prepared by Australian Bullion Company (NSW) Pty Limited (ABN 82 002 858 602) (ABC). The information contained in this article or internet related link (collectively, Document) is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence any person in making a decision in relation to any precious metal or related product. To the extent that any advice is provided in this Document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of any precious metal or related product, you should obtain independent professional advice before making any decision about whether to acquire it.

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