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Gold in a Positive Feedback FOMO Loop

10 July 2020

Precious Metals Commentary

A significant week for gold as it broke through the round number $1,800 level, a figure it last saw in 2011, on the back of concerns about a second COVID wave in the US. Silver followed gold’s lead and poked its head above $19 and holding above $18.60 as we write.

Peaking out at $1,818.09, it is currently oscillating around $1,800 which is a crucial level to hold as it will then likely attract new buyers who have been watching the market but hoping for a correction. Real fear of missing out (FOMO) won’t kick in until gold breaches its previous high of $1,921.

In Australian dollars gold has regained the ground lost when our dollar cleared 0.67 on its way to 0.7064. As we write Aussie gold is looking to pass $2,600 and silver $27.

AUD gold price chart

Gold’s performance has been impressive considering that traditional buyers India and China have been absent from the market. John Levin at TD Securities said in a note on Wednesday that if those two markets were engaged then the gold price would easily have a 2 handle.

As gold steps higher and higher into price regions it hasn’t seen for a long time it results in media headlines and analyst forecast revisions. This drives new investor interest that pushes the price up - a positive feedback FOMO loop.

As an example, see ABN AMRO revising its end 2021 price from $1,800 to $2,000 or Wells Faro saying gold will rise to $2,200 - $2,300 by the end of next year.

We are seeing a lot more “2 handle” forecasts by professional analysts, which is builds belief that gold is in a new bull market.

We would caution that many of those forecasts come with warnings that $1,800 gold will come with a correction and period of consolidation. If that coincides with some short-term strength in the Aussie dollar it could represent a good buying opportunity.

Magic Money Tree

With JobKeeper and JobSeeker due to end on 30 September, the Government is facing calls to extend the subsidy.

Such calls are not just in response to Melbourne going into lockdown again (indicating how tenuous Australia’s success in fighting COVID has been) but also the perilous state of the country’s personal finances.

The Australian Bankers Association (ABA) said that more than 485,000 mortgages have been deferred across the country since March with only 48% estimated to resume their repayments in full.

At the moment, 20% of Commonwealth Bank’s deferred loans have again started making payments with ANZ at only 10%.

The Australian Prudential Regulation Authority (APRA) has given banks an exemption from having to report deferred loans but said that after 31 March 2021 they will have to start classifying those loans as non-performing.

For borrowers still in trouble at that time, the ABA said they could buy more time by switching to interest-only or extending loan terms, but we note that this just adds more interest cost over the life of the loan. That is financially advantageous to the banks but it also means they can avoid having to classify the loans as non-performing.

Another indication of the impact of the lockdowns on personal finances is the fact that 2.5 million people applied to withdraw a total of $18.1 billion under the early superannuation release scheme. That is an average of $7,503 and it is likely that the second tranche will see similar figures.

No surprise then that the RBA held on any change to interest rates this week, saying that its accommodative approach will be maintained as long as it is required”. ABC Bullion’s Nick Frappell was quoted by Yahoo Finance saying that investors shouldn’t expect an increase in Australian interest rates until at least 2022.

We found this chart from AMP Capital of interest as it shows that those low interest rates have not made any impact on home lending, which has been in decline for a number of years for owner-occupiers and investors.

Australian housing lending

It is an indication that things were not well before COVID hit and the chart below of manufacturing purchasing indexes from Merk Investments shows that globally economies started to turn down in 2018.

purchasing managers index

Co-incidental that gold started its run from $1,200 to $1,800 in mid-2018? We think not – as we have been saying for some time now, it looks like smart money saw the turn and started shifting to a defensive stance by allocating to gold.

Given all the above, the Treasurer was reported as considering further stimulus by bringing forward already legislated personal income tax cuts as well as targeted income support.

It is a big change from mid-May when the Treasurer said that Australians know there is no money tree. What we borrow today, we must repay in the future”.

We can’t say we are surprised as even in the best of times governments find it hard to balance their budgets. Yes, these are extraordinary times but there always seems to a reason not to tighten the belt and we do wonder how long it can continue for.

Temporary Nationalisation

The situation in the US is no better, personal finance wise. Currently 4.6 million homeowners have deferred mortgage payments, which is 8.7% of active mortgages representing more than $1 trillion in unpaid principal. The US Federal Housing Finance Agency recently had to extend their foreclosure and eviction moratorium.

Various US rent and mortgage surveys have between 20% to 30% of households failing to make any payments or partial payments.

The National Multifamily Housing Council said that without an extension of the 31 July deadline for state and federal unemployment assistance benefits or a direct renter assistance program “the U.S. could be headed toward historic dislocations of renters and business failures among apartment firms, exacerbating both unemployment and homelessness”.

Like Australia, the US isn’t worried about their government deficit with the Congressional Budget Office reporting an overspend of $863 billion in June 2020. The US public debt has grown a massive $3 trillion in the past three months to hit an all-time high of $26.46 trillion.

The chart below from Bianco Research shows that currently the US is running at global financial crisis levels (as well as showing that governments rarely balance their budget).

US government budget deficits

The US Federal Reserve has been “helping” the government along with a quantitative easing expansion of its balance sheet from $4 trillion to $7 trillion since February.

Marcello Minenna, general director of the Italian Customs and Monopolies Agency, argues that “this balance sheet expansion is akin to a type of temporary nationalisation of the economy”.

The Knockout Round

As we pondered politicians’ proclivity for spending we thought the cartoon below from the 1930s was relevant to the situation we find ourselves in today.

The cartoon is a bit of propaganda for President Roosevelt’s gold confiscation and subsequent raising of gold's official price from $20.67 to $35 per ounce, along with other measures, that Professor George Selgin says effectively “put the gold standard on ice”.

Knockout Round cartoon

Then it was politicians who felt the gold standard was restricting them from fighting the Great Depression. Today Modern Monetary Theorists argue that politicians should cut themselves free from the idea of balanced government budgets to fight the COVID Depression and any other economic problem that pops up.

These days the propaganda is a bit more sophisticated - although putting “modern” into the name of your theory to paint other viewpoints as old-fashioned is a bit crude – but the objective of giving politicians an excuse for spending remains the same.

Maybe we are just old-fashioned but we think the only knockout blow money printing will make is to the value of a dollar.

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.

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.