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Create AccountGold Stable as Markets Crumble!
09 February 2018
Precious metal prices have held their ground this week, with the price of gold in AUD again challenging $1,700oz, whilst silver in AUD is trading above $21oz.
Australian investors in the metals space have been buoyed by a decline in the value of the AUD, which has fallen to USD $0.78, as stabilisation in the greenback, and a continued run of soft economic data in Australia dampens market enthusiasm for a rate hike in 2018.
But market attention this week has been primarily focused on plunging stock markets, as well as the incredible uptick in the VIX index, which is a commonly used measure of market volatility.
In the United States, the S&P500 is now down just over 10% from the all time high it hit in late January, whilst in Australia, its another sea of red on the ASX, which has now fallen over 5% in this pullback.
Indeed the last two years have seen some of the lowest levels of volatility on record, in part caused by the creation of products which allowed investors to pile into short volatility trades.
But all that came to a shuddering halt in the last few trading days, with some short volatility products losing over 90% of their value almost overnight.
This can be seen clearly in the chart below, which plots the return of the Velocity Shares Daily Inverse VIX Short-Term ETN.
Anyone whose been invested in these products gave back years of gains (and then some) in less than a week, an illustration of how high risk these strategies are.
Of more concern to investors will be the fact that it's not just explicit short volatility products (like the one you can see in the chart above) that will be shunned going forward.
The broader narrative (that volatility is dead and central banks have markets under control) is now irreparably damaged.
That will likely encourage a more defensive approach to asset allocation and portfolio construction going forward, which in due course, will be supportive of precious metals, which are, in extremis, the ultimate long volatility hedge.
Given the uptick in volatility in this week, we thought we’d leave you with a link to an article on Livewire Markets, which has 10 great quotes on volatility, and investing in general.
You can access it here.
Earlier this week, we delivered presentations to both the Australian Investors Association, and the Australian Shareholders Association, looking at the role physical gold can play in an Australian investment portfolio.
One of the main benefits of owning gold is that it is a really simple way for an investor to incorporate a foreign currency position into their portfolio, as the AUD price of precious metals obviously increases anytime the local currency falls.
We’ve seen that very play in action this week, with the AUD decline pushing the price of gold toward AUD $1,700 per ounce.
From our perspective, we think there is potential for a more significant fall, especially if other banks follow ANZ’s lead, and wind back their calls for interest rate hikes in 2018.
It’s worth re-iterating that Australia is currently experiencing a decline in east coast housing prices, as well as a peak in housing construction.
At a household level, we are still seeing record low wage growth, lots of slack in the labor market in terms of underemployment, and record high debt to income ratios. Retail sales growth is also quite weak, and official inflation is below the RBA’s target, with the central bank itself not expecting inflation to be back in their target band until June of 2020.
Overall, there seems very little to reason to hike rates at all. In time, this should see the Australian dollar continue to ease, particularly if volatility continues to persist in broader financial markets.
Whilst gold has not continued its rally higher this week (no major surprise give the USD has strengthened), it has obviously held up much better than equity markets have, helping to balance a portfolio and smooth overall returns.
For an illustration of how well gold has held up on a relative basis, as well as why it makes sense to hold gold as long-term asset (rather than try to trade it short term as broader markets are falling) investors should pay attention to the chart below, which looks at the performance of gold and the NYSE composite over the past two months.
As you can see, gold rallied along with the equity market from late November through to late January. From that period on, gold has essentially stabilised, whilst equity markets have given back the entire move, dropping close to 10%.
Whilst gold has only tread water this week, there is a decent chance we’ve got quite a lot of upside to look forward to.
One analyst that seems to agree with that is Jesse Felder, who this week wrote an update titled; “Gold Fireworks on the Horizon”.
In that report, Felder noted that, when looking at a weekly chart; “there is now a clear head and shoulders bottom pattern in play. A break above the neckline would confirm the pattern and project an eventual target near $1,650”.
The chart Felder referred to is included below.
On a relative basis, the upside ahead in gold may well be even more pronounced, with the yellow metal even cheaper today relative to the broader stock market than it was in 1999, the very beginning of this secular bull market.
This can be seen in the next chart, which also comes from Felder’s latest update, which you read in full here.
Given the outlook, we wholeheartedly agree with the conclusion from that article, which states that; “it’s important for investors to have significant exposure to real assets like gold at all times if only for the purposes of diversification. Today, there is a good technical case, as well as a fundamental case, for investors to overweight the precious metal.”
Until next time,
Jordan Eliseo
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.
Australian investors in the metals space have been buoyed by a decline in the value of the AUD, which has fallen to USD $0.78, as stabilisation in the greenback, and a continued run of soft economic data in Australia dampens market enthusiasm for a rate hike in 2018.
But market attention this week has been primarily focused on plunging stock markets, as well as the incredible uptick in the VIX index, which is a commonly used measure of market volatility.
In the United States, the S&P500 is now down just over 10% from the all time high it hit in late January, whilst in Australia, its another sea of red on the ASX, which has now fallen over 5% in this pullback.
Volatility: It's Back!
The carnage was particularly acute in short volatility products, which had been rallying in an almost uninterrupted fashion for the last two years, as the VIX continued to decline.Indeed the last two years have seen some of the lowest levels of volatility on record, in part caused by the creation of products which allowed investors to pile into short volatility trades.
But all that came to a shuddering halt in the last few trading days, with some short volatility products losing over 90% of their value almost overnight.
This can be seen clearly in the chart below, which plots the return of the Velocity Shares Daily Inverse VIX Short-Term ETN.
Anyone whose been invested in these products gave back years of gains (and then some) in less than a week, an illustration of how high risk these strategies are.
Of more concern to investors will be the fact that it's not just explicit short volatility products (like the one you can see in the chart above) that will be shunned going forward.
The broader narrative (that volatility is dead and central banks have markets under control) is now irreparably damaged.
That will likely encourage a more defensive approach to asset allocation and portfolio construction going forward, which in due course, will be supportive of precious metals, which are, in extremis, the ultimate long volatility hedge.
Given the uptick in volatility in this week, we thought we’d leave you with a link to an article on Livewire Markets, which has 10 great quotes on volatility, and investing in general.
You can access it here.
Will the Australian Dollar Continue to Fall?
Earlier this week, we delivered presentations to both the Australian Investors Association, and the Australian Shareholders Association, looking at the role physical gold can play in an Australian investment portfolio.
One of the main benefits of owning gold is that it is a really simple way for an investor to incorporate a foreign currency position into their portfolio, as the AUD price of precious metals obviously increases anytime the local currency falls.
We’ve seen that very play in action this week, with the AUD decline pushing the price of gold toward AUD $1,700 per ounce.
From our perspective, we think there is potential for a more significant fall, especially if other banks follow ANZ’s lead, and wind back their calls for interest rate hikes in 2018.
It’s worth re-iterating that Australia is currently experiencing a decline in east coast housing prices, as well as a peak in housing construction.
At a household level, we are still seeing record low wage growth, lots of slack in the labor market in terms of underemployment, and record high debt to income ratios. Retail sales growth is also quite weak, and official inflation is below the RBA’s target, with the central bank itself not expecting inflation to be back in their target band until June of 2020.
Overall, there seems very little to reason to hike rates at all. In time, this should see the Australian dollar continue to ease, particularly if volatility continues to persist in broader financial markets.
Where to next for Gold?
Whilst gold has not continued its rally higher this week (no major surprise give the USD has strengthened), it has obviously held up much better than equity markets have, helping to balance a portfolio and smooth overall returns.
For an illustration of how well gold has held up on a relative basis, as well as why it makes sense to hold gold as long-term asset (rather than try to trade it short term as broader markets are falling) investors should pay attention to the chart below, which looks at the performance of gold and the NYSE composite over the past two months.
As you can see, gold rallied along with the equity market from late November through to late January. From that period on, gold has essentially stabilised, whilst equity markets have given back the entire move, dropping close to 10%.
Whilst gold has only tread water this week, there is a decent chance we’ve got quite a lot of upside to look forward to.
One analyst that seems to agree with that is Jesse Felder, who this week wrote an update titled; “Gold Fireworks on the Horizon”.
In that report, Felder noted that, when looking at a weekly chart; “there is now a clear head and shoulders bottom pattern in play. A break above the neckline would confirm the pattern and project an eventual target near $1,650”.
The chart Felder referred to is included below.
On a relative basis, the upside ahead in gold may well be even more pronounced, with the yellow metal even cheaper today relative to the broader stock market than it was in 1999, the very beginning of this secular bull market.
This can be seen in the next chart, which also comes from Felder’s latest update, which you read in full here.
Given the outlook, we wholeheartedly agree with the conclusion from that article, which states that; “it’s important for investors to have significant exposure to real assets like gold at all times if only for the purposes of diversification. Today, there is a good technical case, as well as a fundamental case, for investors to overweight the precious metal.”
Until next time,
Jordan Eliseo
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.
