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Gold’s Supercycle Tailwind

11 September 2020

Precious Metals Commentary

Another quiet week for precious metals prices with gold trading slightly higher to US$1,945 and silver roughly 20c higher than this time last week at $26.85. Some of the high-flying stocks on the Nasdaq that we mentioned last week took a further beating, with the index trading 9% lower than the recent peak of 12,000. With the AUD/USD remaining at 72.6c metals are trading slightly higher for local investors.

Despite the low volatility in precious metals of late, we do expect we could see some action soon given the importance of the current technical setup for gold. Gold has been bouncing of the significant support zone identified below for the past few weeks and has managed to put in a lower high during each rally off these levels.

The area of support between $1,905 and $1,920 is quite significant as this is the area of the initial breakout above the 2011 highs in June this year. Below is the hourly US$ gold chart that shows that gold has repeatedly found support at $1,905 these past few months.
gold hourly chart
Zooming out to the bigger picture below with a weekly gold chart shows the significance of where gold is currently in relation to its previous high, and traders will be watching this level closely.
gold hourly chart
Overall, for the bulls to remain in control gold needs to hold above this level over the next few weeks as a break south of this level will no doubt lead to a more medium-term correction.

Conversely, it would be very encouraging to see gold hold this level and trade back through $2,000 to confirm that this latest consolidation is over and a new leg higher is on the cards. Silver will likely follow gold’s lead, so one needs to watch this level in coming weeks to get a gauge of near-term direction.

Gold is Becoming Acceptable

Another week, another fund manager comes out in support of gold. This week it was Alex Pikoulas of Sydney boutique wealth management firm Lipman Burgon & Partners who noted the high government indebtedness we have been concerned about for some time.

Alex says that as it is unlikely that governments will be posting budget surpluses, that population will grow or we will see a productivity boom any time soon, the only way out of our debt trap will be persistently negative real interest rates.

As negative real rates are positive for gold, it is no surprise that Lipman Burgon sees a role for gold in a portfolio to provide “protection against inflation and currency debasement” and an essential role as they say there is no place for government bonds in portfolios as negative rates “mean that long term government bond holdings are certain to destroy real value”.

Our guess is that Lipman Burgon has been recommending gold to its clients, who are “high-net-worth individuals and family offices”, for some time. ABC Bullion has relationships with a number of similar firms and we know that such smart money investors have long had allocations to gold, it is just that they don’t make a song and dance about it.

This is partly due to a natural inclination to discretion by such advisors but also because gold is widely disparaged by uninformed mainstream investment advisors. Articles like Alex’s show that gold is becoming more acceptable to talk about, which will give other investors more confidence to take steps to safeguard their portfolios with precious metals.

Another sign of acceptability is this interview with Chris Brycki, CEO of online investment adviser Stockspot where he argues that gold is better “at actually providing negative correlation to equities at the time when you need it most”.

That is why Stockspot had set an allocation to gold of 12% in its model portfolios a few years ago, which provided protection of between 50% to 80% when markets collapsed around March and April.

Supercycle Tailwind for Gold

Our view is that excessive debt and negative rates will provide long term structural support to gold. Another tailwind for gold looks to be an upturn in the “supercycle” of commodity prices. The long-term chart below from asset manager Janus Henderson Investors shows that commodity prices are currently in a historic trough.
gold hourly chart
While only 10% of gold’s demand comes from commodity style industrial sources, inflation is a major drive of both gold and commodities. As such, gold’s 1980 and 2011 peaks, and toughs in late 90s and 2015 also line up with the commodity supercycles in the chart above.

Their analysis is that the “current supercycle is following the average path of these historic supercycles, pointing to a turn in commodities through the 2020’s” that will last for 20 years.

Apart from inflation, which hedge fund legend Druckenmiller thinks could easily reach 5-10% in the next 4 or 5 years, Janus Henderson also see commodities being supported by Chinese demand, infrastructure and construction as well as increasing population, prosperity and urbanisation globally.

Currently, Chinese (and wider Asian region) gold demand is low – so much so that it trades at a discount within China compared to international prices. This has resulted in China to Hong Kong gold smuggling as people look to sell gold at the higher open market price.

Interestingly, recent World Gold Council research found that 24% of Chinese retail investors have never invested in gold.
gold hourly chart
Our view is that as Asian markets get used to the new higher price level and markets open up post-COVID, Asian gold demand will return in force and provide another boost to gold demand – and with 24% never having bought but thinking about it, that boost could be significant.

This will be in addition to existing levels of Western investment demand, which we cannot see moderating in this current climate. If both West and East are firing at the same time this would be a rare gold super supercycle, as researcher Jan Nieuwenhuijs notes that East and West gold demand have generally offset each other.

Gold Production Cycle

Another booming cycle underway is in Australian gold production. Thuong Nguyen from the Department of Industry, Science, Energy and Resources notes that Australia’s gold mine production has reached a new high of 327 tonnes in 2019 and forecasted to grow to 391 tonnes.
gold hourly chart
The boom in gold mining has been good for ABC Refinery, which is currently processing around 100 tonnes of gold annually, along with 500 tonnes of silver.

To sustain that gold production, miners need to spend money on exploration. Last year the industry spent $1.1 billion looking for gold. Dividing that by our production of 327 tonnes works out at $105 per ounce – just to look for it, let alone mine and refine it!

Insurance Headache

Thuong also notes that last year over half of Australia’s gold exports went to the United Kingdom, mostly like ending up in gold ETFs. As we noted back in May, when Asian demand recedes (the traditional destination for Australia’s gold) London picks up the slack as a large number of ETFs around the world vault their metal in London.

Regarding gold ETFs, Bloomberg shone some light on a little understood fact that the ETF gold “hoards are too valuable to insure fully anyway” with the banks that vault the gold for the ETFs “assume the rest of the liability themselves”.

For example, the world’s largest ETF – GLD in the United States – is currently holding just over 1,300 tonnes. With that stash worth over $112 billion it simply isn’t possible to get full insurance coverage. Globally, ETFs hold over $230 billion worth of gold.

Bloomberg report that a rising gold price is causing headaches for some storage providers given there is a dollar limit on the amount of coverage insurers will provide.

It is not a problem that has affected ABC Bullion or Custodian Vaults as we maintain strong relationships with various underwriters at Lloyd's of London, the world's largest insurance syndicate, and leading precious metal insurance provider.

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 document has been prepared by Australian Bullion Company (NSW) Pty Limited (ABN 82 002 858 602) (ABC). The information contained in this document 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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