Gold Sell-Off, When Will It End?

Despite the Federal Reserve keeping interest rates on hold, Gold prices continued to ease this week, with further falls in our currency providing somewhat of a floor for AUD prices.
 
The Federal Reserve indicated that the US would see two more rate hikes this year, with the most probable months being September and December. We saw some USD strength on the back of the announcement, which has the AUD/USD back at 0.7363.
 
In the short term the Fed could indeed get away with several more 0.25% increases in the cash rate, but in the long term the huge increase in debt since the GFC will not handle a normalisation of rates in any meaningful way, without having a substantial impact on economic growth. 
 
Gold currently hovers precariously just above critical technical support in the region between the psychological ‘big figure’ at USD 1200.00 & the 10^thJuly 2017 low at USD 1204.50, since commencing its uninterrupted descent from the USD 1365.50 high on April 11th. Previous major support at USD 1236.50 is now acting as technical resistance.   



XAU/AUD:We had previously commented that “it remains too early to affirm that the lows are in place at current levels and to discount the possibility of further downside price action towards the next level of major technical support emerging at the AUD 1632.00 level - the low seen in mid-December last year.” and this till remains the case with XAU/AUD’s technical prospects largely mirroring those of XAU/USD noted above. Specifically, XAU/AUD currently hovers precariously just above critical technical support at the AUD 1632.00 level - a break of which opens the way to the 19th October 2017 low at USD 1625.00 and then significant technical support at the AUD 1615.00 level with lows there registered on 25/08/17, 21/09/17 and 04/10/17.



The recent drop in prices has not deterred domestic physical gold investors, as we have seen a very big pickup in volume for the month of July compared to the May, June period. Usually a good sign that we’re getting close to the short term lows. 
 
Yesterday the World Gold Council (WGC) released its ‘Gold Demand Trends Q2 2018’ which highlighted the following:
 

• “Overall demand was 964t, a decrease of 4% compared with 1,008t in Q2 2017
• Total consumer demand fell by 1% to 758t, from 767t in the same period last year
• Total investment demand was down 9% to 281t compared with 310t in Q2 2017
• Global jewellery demand fell 2% to 510t, from 519t in the same period in 2017
• Central bank demand decreased by 7% to 89t compared with 96t in Q2 2017
• Demand in the technology sector increased 2% to 83t compared with 81t in Q2 2017
• Total supply was up 3% to 1,120t, from 1,086t in the same period last year
• Recycling was up 4% to 295t, compared with 283t in Q2 2017”

 

Property Price Slide Continues

 
The state of the Australian economy and our ability to avoid a recession in the coming years is highly depending on our property market, which is showing signs it has begun to roll over.
 
Property prices are very relevant to gold Investors. If they continue to fall and we do not find the growth in other areas, the economy could quite easily slide into a recession. This will have an impact firstly on interest rates (which could even be cut further) and secondly, a potentially shattering impact on the Australian dollar. 
 
A lot of our SMSF client base will tell you that their primary reason for investing in gold is purely to hedge their other Australian dollar denominated investments, which often include Australian property and shares in the Big 4 major banks, who are obviously highly leveraged to our property market.
 
Our market commentary over the past few years has consistently warned of potential problems in the property market, especially in regards to the price explosion in Sydney and Melbourne that has occurred since the latest rate cut cycle that started 2012.
 
Finally the tide seems to be turning. From a flood of media articles on properties selling for record prices, hundreds of thousands of dollars over reserve, and clearance rates around 80%, to some of the biggest plunges in prices in 6 years. How things can change in just a short twelve months. Year on year change to July 2018 has seen a 5.4% drop in Sydney prices, and we believe this is the beginning of larger falls in years to come. 
 
We are seeing increasingly bearish calls in financial media of late, as the mainstream mindset of ‘property prices can only ever go up’ begins to fade. A combination of tightened lending standards and the sudden absence of foreign investors has put a halt to the rapid rises of recent years.
 
Most importantly, the phycology has changed completely in a few years, where in 2016 it seems everyone was climbing over each other to buy anything at any price possible just to get into the market. Now we see both investors and owner-occupiers taking a closer look at what they are buying, and what they’re prepared to pay. CorLogic reported weighted average clearance rates of all capital cities have dropped to just 54.26% in August.
 
 
Source: https://www.macrobusiness.com.au/2018/08/bankruptcies-to-rise-as-negative-mortgage-equity-spreads/

For those yet to read our detailed report on Australian Housing from March you can find it here.
 
 

Chinese housing facing potential downturn

 
The situation facing the Australian housing market is potential nothing compared to the misallocation of capital and speculative bubble that we have seen in China. 
 
ABC News recently reported on the growing concern of Chinese “Ghost Cities”, which are massive state-run development projects of entire cities completely unoccupied. A more detailed report on this can be found here.
 
Putting a number on the unoccupied dwellings is hard. A survey conducted by FT Confidential Research showed that a whopping 29% of Chinese urban households owned at least one vacant property in the second quarter this year. 
 
The Chinese growth story is also one of credit expansion, as the country recently hit a record of 18% of GDP used purely to servicing debt. In recent times there are many articles indicating the Chinese real estate market is likely to cool in coming years, which will ultimately have some impact on domestic investment in Australian property.
 
We have already seen a plunge in Chinese investment in domestic residential real estate. Value of applications have dropped from $72 billion in FY16 to just $25 billion at EOFY17, no doubt a result of recent tightening of lending standards.
 
  
Source: http://www.abc.net.au/news/2018-05-29/chinese-property-investment-drops-as-tougher-regulations-bite/9811942

If indeed we see a downturn in Chinese property development in coming years, commodities will surely come under significant pressure and likewise our currency. 
 

Until next time,
 
John Feeney & Andre Lewis 
ABC Bullion

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