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​Gold Hits All Time High of $1,880

22 February 2019

Gold price chart

The rally continued this week with gold breaking out north of USD$1,320 and quickly running to a high of $1,346 per ounce, before retreating back to $1,327 currently. Silver followed and reached highs of USD$16.20 before pulling back to USD$15.90. The bull market in palladium continued to gain momentum, as the hottest precious metal on the planet right now spiked to almost USD$1,500 before retreating.
With the AUD/USD remaining at 71.66 US cents gold broke records reaching an all time high above $1,880 per ounce this week, the highest point since 2011 and the highest price ever seen in AUD. We currently trade at $1,871 with silver higher too at $22.40.
Given the reduction in the cash rate and massive credit expansion in Australia since 2011, it only makes sense to see gold prices move to new highs in AUD terms, as our currency continues to come under pressure, losing ground against most majors. But given that gold in USD is still so far below it’s 2011 peak, it’s actually scary to think where gold in AUD might be in a few years if we are indeed seeing the beginning of a new bull market in PMs.
The last time gold was trading at this level in 2011 Australia was entirely different:
  • Julia Gillard was Prime Minister
  • RBA Cash rate was 4.75%
  • AUD/USD was above $1.00
  • ASX 200 was 4700
  • Government Debt was only 24.2% of GDP (Now 42%)
  • Private debt was 185% of GDP (Now 205%)
  • Money Supply M3 was 1,370 AUD Billion (Now 2,100 Billion)
  • Government Bond 10Y yield was 5.4% (now 2.1%)
  • And of course, property prices in Sydney are now over 50% higher.
The main difference with then and now is the reduction in interest rates has sparked an explosion in property prices and household debt in Sydney and Melbourne markets. Sydney house prices rose 42% from Aug 2012 to Oct 2015 during the rate cut cycle, as we repeat a very similar scenario to the US in the early 2000s.
Sydney house prices  
Next Test for Gold in USD
An interesting technical area of resistance is approaching for gold in USD as we can see in the longer-term chart below. Gold has already surpassed several technical levels such as the $1,300 handle, but it still has much to do.

Gold is quickly making its way toward the top of the trading range seen below. A breakout up past $1,365 could really spark the enthusiasm of bulls and may see this rally continue. But, we are cautiously optimistic, as gold is looking short-term overbought on the weekly chart, and at risk of coming into some resistance on the back of profit taking around this level.
Gold may need a rest before it rallies past this trading range of the past few years, so don’t be too surprised if this is what we see.
Gold US dollar price chart
The recent highs of the last few years in USD terms coincided with some ‘black swan’ events such as the surprise Brexit vote rattling markets and the election of Donald Trump, which caught many traders off guard. Now, not too much is happening in comparison to those events and yet we see gold staging somewhat of a stealth rally towards this area of previous resistance.
In the background is the growing doubt of the Federal Reserve’s direction. Market participants are starting to call the Fed’s bluff on their ability to shrink the balance sheet through Quantitative Tightening and continue their rate hike cycle.
If they fail to do so, expect some significant weakness in the US dollar having a beneficial tailwind for precious metals prices. We will see how this pans out throughout this year.
On this note, Goldman Sachs chief economist Jan Hatzius recently said the bank notes that "almost all participants thought it would be desirable to announce soon a plan to stop reducing the Fed’s asset holdings later this year”. So GS is hinting at a pause in QT later this year, potentially in Q3.
In the big picture, why this is so relevant is that when Bernanke was head of the Fed and put QE into action, this was done under the assumption that the Fed could eventually unwind its entire balance sheet when the economy was in better shape. Most market participants believed that this was possible, so if it turns out not to be, the whole market could have a rude awakening and the strength in the US dollar of recent years would get thrown into question.
With the weekly USD index chart below, one can see the strength in the US dollar since the GF, and some of this would have to unwind if belief in the level of control the Fed has starts to fade.

Gold USD 
Source: Bloomberg

Gold Rush in ETF Market

We talked recently of strong inflows from US investors into gold ETF in December and January, and we can see recently that money is flowing into gold mining ETFs such as VanEck Vectors ‘GDX’.
GDX is the largest materials ETF and tracks corporations largely involved in mining gold and silver. The $11 billion ETF saw trading volumes spike to its highest in two months this week, with USD$2 billion exchanging hands on Tuesday alone.  This is double the fund’s usual daily volume and more than any other US ETF that day.
Gold Rush
We have repeatedly said that one key driver for gold prices in 2019 and 2020 remains to be the uptake of European and US investors and we are starting to see this pan out.

RBA February Meeting

We had some more economic wisdom out of the RBA this week with an epiphany that if property prices continued to fall, it could result in lower GDP growth than forecast. Amazing insight, and the full statement is below:
“From a longer-run perspective, members assessed that, following such large increases in housing prices, the effect of the recent price falls on overall economic activity was expected to be relatively small. However, members observed that if prices were to fall much further, consumption could be weaker than forecast, which would result in lower GDP growth, higher unemployment and lower inflation than forecast.”
Westpac chief economist Bill Evans today predicted that RBA would cut the cash rate by 25 basis points in August and then again in November because of a downturn in the economy. The party is building for those in the rate cut camp.

Monthly Precious Metals Positioning Report

For those technically minded, our monthly technical and precious metals positioning report by Nicholas Frappell is out, which included data on gold managed money positions and technical analysis on various asset classes. You can read this here.

Celebration Sale!

With the price action in precious metals this week keeping us very busy, we have a shorter market update than usual, but also some good news. We are throwing a celebration sale this weekend, which will start at 5:00pm today and last all weekend until Monday 8:30am! The following reduction in usual selling premiums will apply to any online sales of these products:
Until next time, 
John Feeney
ABC Bullion

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