After closing out 2015 as one of the least popular asset classes on the planet, precious metals have come ‘back to life’, holding their own and even advancing in value whilst financial markets and broader commodities endure the kind of volatility we’ve not seen for years.

ETF investors are buying again, coin demand the world over is robust, whilst interest from retail clients, institutional investors and SMSF trustees has noticeably picked up in Australia, something we expect to continue throughout 2016

In this weeks market update, we’ll be looking at some of the latest gold charts, what is happening in stock markets the world over (decreases in which are spurring precious metal demand), and why gold as an asset class reminds us of the latest Hollywood blockbuster; “The Revenant”.

We are also going to share some thoughts on an interesting report published earlier in the week by PWC, who interviewed CEO’s around the globe regarding their view on the economy, and future investment and hiring plans.

The Revenant

Revenant: “one that returns after death or a long absence” from the Latin revenir: to return Mauled by a vicious bear that led to a 40% correction in USD prices between 2011 and 2015, gold was for all intents and purposes “finished” as an asset class in the eyes of most investors just a few short weeks ago.

Indeed a certain investment newsletter boldly (FOOLishly?) proclaimed “The Death of Gold” around about the middle of 2015, not long after the Chinese announced their first national gold holdings update in years, a number which disappointed most analysts and gold bulls, who were expecting a higher number.

But just as Leondardo Di Caprio was winning a golden globe for his performance in the Revenant so too is gold slowly returning from the dead, with prices touching USD $1100 and AUD $1600 per ounce at one point this week.

UBS said much the same thing earlier this week, discussing the ‘brand repair’ job gold was currently undergoing, with the yellow metal needing to

1). Display its safe haven attributes

2). Perform at odds with risk assets

in order to continue to attract investors and scare out a few short positions. 

So far so good in 2016, with the move earlier in the week toward AUD $1600oz putting the YTD performance differential with the ASX at some 20%, though this gap has closed narrowly with the slight pull back in AUD gold (off the back of the AUD pushing back toward $0.70 vs. the AUD.

As discussed, this has led to a rush of SMSF and HNW investor demand locally, with volumes incredibly strong to start 2016, whilst there have been numerous stories about the strength of retail demand around the world, with the US Mint seeing almost unprecedented demand for gold and silver coins.

We think those investors will be well rewarded, and were interested to note that investors like Jeffrey Gundlach, who predicted the recent oil crash, now see gold moving higher, perhaps as much as 30%. Were that to happen in an environment where the AUD is also falling, then it will be a great year for local precious metal investors.

Technical Update

with John Feeney

Going off last weeks Market Update it is much the same this week, with focus on global stocks. The MSCI global stock index has officially hit bear market territory and many of the larger indexes across Europe, US and indeed Australia have now broken key technical levels and long term upward trends that have been in place since the 2009 GFC low.

What is also interesting to note is that the 'buy-the-dip' brigade of the mainstream media in the US have all of a sudden now turned the most bearish I think I can ever recall. Below is a Chart from CNBC showing global stock indexes off their 52 week highs and it is pretty alarming.

It’s not looking good for those markets yet to sell off, and despite the charts indicating a short-term bounce is due, we think this may be just the beginning of a much larger sell-off. A drastic change in US monetary policy might be the only thing that changes this outlook, with the odds of the Fed following through on their projected rate hikes in 2016 surely a fantasy with financial markets in such turmoil.

If we were to go purely off the charts the S&P500 looks oversold on the William's and is in all likelihood due a short-term bounce. I think the higher probability if this was to occur would be for it to top out below 2000 before rolling over and continuing lower.

There is now so much weakness in the long-term chart that many are now looking to sell into any rallies, though the promise of more monetary stimulus (which Draghi hinted at) could well give markets a boost.

Interesting times ahead to say the least, with the ASX also caught up in this maelstrom. The local market is staging a rally today, and has put on over 1%, but its still struggling around the 4,900 point mark.

The USD Gold Chart, unlike broader equity markets, has been performing well, bearing in mind that the US dollar has also seen some flight to safety demand and is up around 3% year to date.

We have seen good consolidation around the USD $1,080 an ounce level and now are seeing the market attempt to push toward the psychological USD $1100 an ounce level, with decent volume on display.

As we discussed last week, there has been a noticeable pick up in ETF demand for gold, which is captured neatly in the following chart from US Global Investors.

It is only 20 plus tonnes so far, but as we’ve long pointed out, ETF holdings have been depleted at a rapid rate in the last four years, so this is a positive sign, and proof positive of the changing sentiment towards the bullion market.

For gold to meaningfully push higher in the short term, we’ll likely need to see a further breakdown in confidence re equity markets and some funds to roll out of stocks and into precious metals.

This would no doubt lead to a bout of short covering. We think personally think gold will find it more challenging to move from USD $1090oz to USD $1120oz, than it would be to then push a further USD $30oz higher, up toward the USD $1150oz mark

Gold’s outperformance in AUD will continue if this occurs, with the market not looking too overbought based on the below indicators.

We also think the ability of gold to prosper in the last three weeks, despite crashing commodities, a generally strong US dollar and the huge volatility in financial markets bodes well for the rest of the year.

Either way, we’re definitely happy maintaining our long gold and silver positions, in both our personal and SMSF accounts.

CEO’s are Gloomy

With the global elite meeting in Davos, there have been no shortage of media headlines and prognostications, with Ray Dalio of Bridgewater fame noting that there’ll be a global depression coming if all assets remain correlated like they have been of late.

William White, former chief economist for the BIS, hit the nail on the head when he stated that: "Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief," he said. "It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.”

This was covered in an excellent article (well worth the read) from Ambrose Evans Pritchard at the Telegraph, which you can read here.

We noted with interest that White went on to note that; “The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians."

That is not a million miles away from the Austrian school of economics, with Von Mises famously noting that; “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

Maybe the Austrians were right after all!

And whilst gloomy prognostications from central bankers are sure to get the headlines, they would be of no surprise to regular readers of ABC Bullion market updates, or indeed anyone who is paying attention to CEO’s the world over.

Remember these are the people that, along with their boards, make the actual decisions re capital investment, and whether to hire or reduce headcount. You’d think there opinions would be at least as important as those of central bankers and policy makers. But it’s a sure sign of the times that they are not, best evidenced by the complete lack of attention that we have seen in the mainstream financial media toward the recently released PwC 19th annual global CEO survey.

Accessible here, the report discusses the deterioration in the confidence of CEO’s the world over, citing concerns that range from the Chinese economy slowdown, to cyber security concerns, to the readjustment of the Australian economy in the aftermath of the mining boom.

When it comes to declining confidence at the executive level, one chart really does tell the story, and this one below is the standout from the report, showing the percentage of CEOs who are confident the global economy is heading in the right direction.

As you can see, there has been a noticeable decline since 2014, and with that in mind, its no wonder business investment plans are so tepid, and whilst headlines regarding mass lay offs are sadly going to remain part of the economic landscape for some time.

Digging into the data and it was interesting to see what the primary concerns of CEOs the world over are. When it comes to what they are most worried about, we can see that

• Nearly 80% of CEOs are “somewhat concerned” or “extremely concerned” by over regulation

• Just under 70% fit into the same profile re fears of increasing taxation, and the likely government response to the fiscal deficit and debt burden

The other primary areas of concern are geopolitical uncertainty, and exchange rate volatility. Add all that together and its hardly a glowing endorsement from the business community when it comes to the efforts of central banks and developed market governments to intervene in their economies on the epic scale like they’ve chosen to in the several years since the GFC hit.

It’s fair to say that as 2016 unfolds, it will be increasingly clear to more and more people that the financial and economic storm has not truly passed, and their remains significant merit in investing in physical precious metals.

We are happy to be positioned accordingly.

Until next week

Warm Regards

Jordan Eliseo

Disclaimer

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