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ABC Bullion

Greenspan Shrugged, Credit Suisse and RBA Fake News

23 February 2017

The precious metal complex has continued its solid start to calendar year 2017, with gold currently trading at USD $1,238 per troy ounce, whilst silver is sitting at USD $18.15, with the two metals up 7% and 14% respectively this year.
The rally in the AUD (more on this below), is still acting as a headwind for local investors, with the spot price for gold and silver currently sitting just below AUD $1,610 and AUD $23.60 respectively.
There has been no shortage of gold specific news in the last week or so, including the latest news out of Russia, where the central bank added 31.1 tonnes (1 million ounces) to official reserves, continuing their accumulation of the yellow metal, with their total holdings now pushing toward 1,650 tonnes. You can read more about this story here.

As a whole, though central bank demand eased in 2016, they were still net buyers of several hundred tonnes of the yellow metal, continuing to accumulate hard currency and diversify foreign exchange reserves, as they have since the GFC hit.
Short-term traders have also pulled back on their bullish net positions in the last couple of weeks, according to the latest CFTC data, and are a long way from the exuberant highs we saw back around July last year (incidentally a time when commercials were very short). You can see this, as well as open interest in the chart below, which was sourced from this article.

Meanwhile, gold ETFs are seeing some inflows, with this report, stating that ETF Securities Gold ETPs saw over $140m in inflows in the last week, the highest of any sector they cover, suggesting there is support out there for the precious metal at these levels.
Portfolio diversification is obviously one of the drivers behind that uptick in gold allocations via the ETFs, though we think fears of higher inflation are also beginning to play a part, with latest CPI data out of the United States showing inflation heading back toward 2.5% per annum, more or less a five year high, as per the chart below. 

Separately, a survey from Bank of America Merrill Lynch suggested a record number of fund managers now believe gold is undervalued, whilst a third suggest it is likely to be the best hedge against a rise in protectionism.
This is perhaps not so surprising an outcome seeing 41% of investors thought being long the USD was the most crowded trade, with the net percentage of people thinking the Greenback is overvalued reaching a level not seen since 2006.
Whilst that could be seen as gold bullish, the contrarian in me can’t help but think there is more potential upside for the USD given those survey results, which, should it eventuate, would likely limit gold price gains.
No one (or nearly no one) is bearish at the top!
Interestingly, some 36% of respondents saw European elections as the biggest potential “tail risk” this year, which makes one wonder if a large number of the upcoming elections (particularly the Dutch and French ones), will end up being damp squids when it comes to their market impact.
We each have a view on the politics, but its safe to say that after Brexit and the Donald, the prospect of Wilders or Le Pen winning power probably no longer qualifies as a ‘black-swan’ event!
You can read more about those survey findings here.

Even the technical readings for gold (see chart below) aren’t painting a clear picture necessarily, with RSI and MACD a long way from overbought, though corrections have started from these kind of reading levels in the past.

As such, we’ll finish this section on gold on a more cautious tone, referencing this article from Greg Canavan (an analyst we highly respect here at ABC Bullion), who rightly points out that the chance that gold’s next substantial move could be to the downside is impossible to rule out. 

Dollar cost averaging into this market still seems to be the order of day.
Australian Dollar
As you can see below, the AUD has had a strong start to 2017, rising toward USD $0.77, after testing the USD $0.72 range twice last year, in Q3 and again in the lead in to Christmas.
This strength has been driven by a number of factors, including a very hawkish sounding RBA, who in our opinion are way too optimistic on the outlook for the Australian economy in the coming years.
Just as importantly, an absolute boom in the price of iron ore is driving the AUD. 

Just as importantly, an absolute boom in the price of iron ore is driving the AUD. Our key commodity export, which looks like it’s heading back toward USD $100 per tonne, has more than doubled in the past 18 months, practically going parabolic since October 2016. The price is boosting the Australian resources sector, as well as the Federal Governments bottom line, though most industry insiders are expecting it to pullback meaningfully, with Macquarie pointing out there is no shortage of supply, expecting prices to fall back toward US $60 per tonne.
Back to the AUD, and impressive though the rally has been, we can’t help but think it’s starting to get long in the tooth. We wouldn’t want to call a top in the Australian dollar just yet necessarily, but there are a lot of banks out there busily upgrading their AUD forecasts, which is typically a sign that a correction is due, whilst it’s looking fairly overbought based on a range of technical indicators, including RSI.

Any weakness in the AUD will of course support metals prices for local investors, with a gold price north of AUD $1,700 per troy ounce and a silver price of AUD $25 per troy ounce fairly easy to envisage, based purely on currency moves.  

Australian Housing and RBA Fake News
Moving on from the latest developments in the gold market and its daily gyrations, and I thought I’d share a few other interesting articles and research I’ve come across in the last week or so.
The first is to do with the Australian housing market (something directly relevant to most ABC Bullion clients), and was published by a gentleman by the name of Gareth Brown, who works for Forager Funds management.
Titled Demographics for Dummies (and the RBA), the report delves into the commonly held myth that Australia is more suburbanized than the rest of the world, and that this is a major driver of the huge difference in price to income ratios for housing between Australia and the United States.
It would be a useful explanation – if it were true, but sadly it’s not, as Brown has gone to some lengths to point out.
Scarily, the argument that Australia’s higher levels of suburbanisation are in part responsible for our record high house prices are promoted by the RBA itself, including by the Head of the Financial Stability Deparment, Luci Ellis, who some are tipping will end up replacing Phil Lowe in the Governor’s Chair.
What is even more troubling is that the RBA, and Ellis, are likely very well aware of the fact that that their analysis is “incomplete / meaningless/ useless/ dangerous”, as Brown wrote a detailed report debunking it over a year ago, which the RBA have seen!
That they are ignoring it to ‘justify’ higher house prices, all the while desperately talking up growth is no cause for comfort! 

You can read the two reports Gareth wrote in full here.
Demographics for Dummies (and the RBA) – dated 18th Feb 2017

Statistical Buggery: RBA Urbanisation – dated 8th March 2016

Credit Suisse Global Investment Yearbook

The Credit Suisse Global Investment Yearbook is in my opinion a must read, and this year’s (which was just published), is well worth your time. It highlights asset class returns, inflation statistics and the like across a large number of countries, including Australia, from 1900 to end 2016 inclusive.
There are some great charts in there, not least the following, which shows how industry weightings in the US and the UK have changed in the last 115 years.

According to the report, of the US firms listed in 1900, more than 80% of their value was in industries that are today small, or extinct, whilst the figure for the UK is 65%.
The report includes a number of other key insights, including the substantial outperformance of bonds relative to stocks in most developed market nations over the past 16 years, which you can see in Table 1. It also includes the following chart, which shows the real return on bonds in extreme time periods between 1900-2016.
Pay particular attention to the last column chart, highlighting the golden era of bonds between 1982 and 2015, with returns of 6.9% annualised, essentially matching equity markets over this time period, with substantially lower volatility.

For reference, the return over the entire 117-year period covered by the report is just 1%. You can draw your own conclusions as to what that means for fixed income investors in the decade ahead, though we agree with the opinion in the report itself, which states it would be a “fantasy” to extrapolate the strong returns of the current golden era in fixed income markets into the future.
We strongly suggest you pour yourself a cup of coffee and have a read through the Credit Suisse report, which you can download here over the weekend. 

Greenspan Shrugged
Moving on from Australian Housing and Credit Suisse, and it would be remiss not to finish without sharing a few comments re Alan Greenspan’s recent interview with the World Gold Council, which appeared in their February 2017 Gold Investor update.
Greenspan tends to divide, and often infuriate people in the precious metal/hard money camp. One the one hand – it is well known that he was a disciple of Ayn Rand, and of course he wrote “Gold and Economic Freedom” back in 1966, firmly establishing his bona fides as a pro-gold/limited government enthusiast.
On the other hand, he was of course Federal Reserve Chairman from 1987 to 2006, sitting in the driver’s seat throughout a period that saw an explosion in debt levels the world over, rising inequality, rapid financialization of the economy, and of course no shortage of market crises, culminating in the GFC, which hit soon after he handed over the reins to Ben Bernanke.

Irrespective of one’s opinion, Greenspan is always worth a listen, and his interview with the WGC contains some fairly important insights, including his statements that it was not the gold standard that failed around the time of WW1, but rather a political failure, owing to an unrealistic desire to return to pre-war exchange rates.
He also (correctly in our view at least) points out that the global economy would not be in the financial mess we are in today had we not abandoned the discipline of the gold standard, noting that; “the gold standard is a way of ensuring that fiscal policy never gets out of line”.
His lack of confidence in the Euro project is also clear, as is his faith in gold as the ultimate currency and form of wealth protection, noting that gold; “along with silver, is one of the only currencies that has an intrinsic value”, and that it has; “always been the way”.
I suspect if you spoke to Yellen, or Kuroda or Draghi in private, or after a few glasses of red wine, they’d admit to largely the same thinking, though the nature of their jobs obviously precludes them from admitting as much in public.

To that end, whilst we don’t think Greenspan deserves a “free pass” for his role in the credit bubble that has built in the past 30 plus years, the truth is that no one person’s fault, but rather the fault of society as a whole.
Perhaps knowing the trend toward fiat money, financialization and unlimited credit creation was irreversible, and there was nothing any one individual could do to stop it, Greenspan simply shrugged, and got on with an impossible job as best he could.
You can access the latest version of Gold Investor, and Greenspan’s thoughts, here.

Until next time,
Jordan Eliseo

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