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Half the Aussie Workforce on Government Support

15 May 2020

Precious Metals Commentary

Gold made a nice breakout Thursday night, clearing the recent highs of $1,730 and trading through the consolidating range of the past few weeks. The upward trend remains intact as news from the US economy continues to be dire. US jobless claims rose to a whopping 36 million this week and we saw equity markets and gold both trade higher, which would only indicate that expectations around more ‘money printing’ is being baked into both markets.

The AUD remains strong at 64.5 US cents, which is preventing us from seeing new all time highs in AUD terms for now, $2688 at time of writing.

Gold in USD
The metal to watch closely in our eyes remains silver. Given the overwhelming increase in demand for physical metal and waiting times we are experiencing it was only a matter of time before we see the price reacting, and we have seen silver creep 5% higher throughout the week in AUD terms. The Gold Silver Ratio dropped back to 109 as we see silver outpacing gold in very recent times.

The bottom we mentioned which occurred around the 18th of March is looking like it won’t be retested at this point and we expect the strength in investment demand to continue given how elevated the gold silver ratio looks. The 52-week high sits at $28.60 so plenty of room left to the upside for 2020 in our humble opinion.

Silver in AUD
For forecasts, we had TD securities this week calling for USD $2,000+ in the latter part of 2021, citing “the resumption of the downward trend in real rates, which remain in negative territory, along with a low cost of carry and concerns surrounding fiat currency debasement and skyrocketing debt”. They noted policy rates would continue to be set below the rate of inflation and this along with monetization pressures of governments to tackle their ever growing deficits should see investors look to gold as a safe haven. We could add to this we agree with their outlook, but note that many financial analysts commenting on gold may be overlooking silver at this point, as it remains an attractive value play in comparison.

China – Australia Trade Tensions

This week China suspended beef imports from four Australian abattoirs who make up around 35 per cent of our exports to China. While said to be due to issues with labelling and health certificates, media reports speculate the move is related to dissatisfaction by China over Australia pushing for an investigation into China’s handling of the coronavirus.

The move follows a threatened 80% tariff on Australian barley and April 26th comments by Chinese Ambassador to Australia, Cheng Jingye, that the coronavirus investigation would result in the Chinese public souring on Australian food or travel and “maybe the ordinary people will say ‘Why should we drink Australian wine? Eat Australian beef?'”

If the trade tensions escalate we are pretty confident that Chinese investors won’t be saying “Why should we buy Australian gold?” As we noted last year, the majority of Australia’s gold goes to China although a combination of coronavirus restrictions and a rising gold price has seen that drop off.

Australian Gold Exports (tonnes) Chart
Note that as Asian demand receded, Australia’s gold ended up in London as that is the major vaulting and trading location for gold globally. That gold has been taken up by investors buying gold ETFs, as a large number of ETFs around the world vault their metal in London.

Bullion coin demand is also up significantly, with Refinitiv reporting a 23% rise this quarter on Q1 2019 and 51% up year-on-year across nine major mints globally for a total of 2.2 million ounces in Q1 2020.

Reuters reported that gold demand improved in China this week as buyers took advantage of hefty discounts. We checked in with ABC Bullion’s Nick Frappell and he said that while he thought Asian demand would return, he noted that banks and wholesalers still had pretty high inventory levels that first needed to be worked through before Asian buying would impact the price.

George Magnus, an independent economist and research associate at the China Centre at Oxford University, says that “China now has a major unemployment problem” and is facing a “moment when a major demand shock and balance sheet and other growth-sapping economic factors are colliding”. Historically, Asian buyers are price sensitive and retreat as prices get toppy but we feel that economic insecurity in China and other countries in the region will mean safe haven motivations to buy gold will prevail over waiting for a cheaper price.

It is our view that the eventual addition of Eastern demand on top of Western demand, which we don’t think will drop off any time soon, will give the price a leg up to a new level.

Aussie Employment Shocker

Trade tensions with China haven’t helped the Australian dollar and a big drop in our employment figures added to the downward pressure. According to Australian Bureau of Statistics (ABS) an all-time high of 594,300 Australians lost their jobs in April for an official unemployment rate of 6.2%.

However, that figure hides the real story and at least the ABS noted that if you included those who stopped looking for work (those aren’t included in the official figures) then the unemployment rate would have been 9.6%. But the story doesn’t stop there, with the under-employment rate (those who are working but not as many hours as they want) increasing dramatically to 13.7%.

Together that totals 23.3%, which is close to the more reliable Roy Morgan figures we prefer to use, as they have a more realistic definition than the ABS of what “unemployed” means. Roy Morgan noted that the ABS considers the estimated 6 million Australians on JobKeeper as employed – whether they are currently working or not.

Roy Morgan Unemployment & Under-employment Chart
Some of those 6 million are in the 1.82 million under-employed category, which leaves over 4 million who arguably should be categorised in the figures as they would be otherwise unemployed.

Six million on JobKeeper plus 823,300 unemployed is over 50% of the workforce, so we think it is fair to say that half of Aussie workers are on government support.

That figure underlines the need to ease lockdown restrictions and get people working again while limiting the chance of another outbreak. However, it is unlikely the economy will get back to where it was in the short-term, or even medium-term.

Philip Lowe, Governor of the Reserve Bank of Australia said back in April that COVID-19 will change the mindsets of some people and businesses and therefore precautionary behaviour will persist. He says that “we are likely to lose some businesses, despite best efforts, and some of these businesses will not reopen” and that with higher debts levels “some households might revaluate the risks of having highly leveraged balance sheets”.

Christopher Joye (Coolabah Capital Investments) is concerned that the “huge size of Australia’s fiscal stimulus could reduce at the margin the incentive for workers and businesses to spin activity back up” and “burden future generations with massive amounts of debt that was not actually warranted”.

Zimbabwification of Wall St

One change in mindset and precautionary behaviour we are confident will occur is investors looking for protection against government money printing.

Yet another example of the sea change in professional views towards precious metals we have been noticing recently comes from the Financial Times. While it was posted on their more editorially unconstrained blog and not the broadsheet, we were struck by the explicit reference to the idea that those closest to the money printing benefit, which is something we have only seen mentioned in the niche gold blogging community.

The author, Paul Murphy (head of the Financial Times’ Investigations section), theorised that the reason stock indices have performed so well when the real economy is hurting is because investors are buying insurance against inflation.

This mindset is similar to what happened to the Zimbabwe Stock Exchange in June 2008, which rose exponentially when the country was in crisis. The reason is that “during a hyperinflation, stock markets act as a quick and accessible store of value”.

Paul says that “those who were closest to the Zimbabwe dollar printing presses (the generals, government ministers, senior civil servants) would take their freshly minted paper and bang it straight into whatever share was available”.

Likewise, he says, what may be happening now is that those who are “getting first dibs on all the quantitative easing being created – are just protecting themselves against a coming inflationary spiral the likes of which we’ve never seen”.

The Financial Times also recently quoted Jim Rogers who said he has started buying gold last year and that “inflows into gold and silver will increase as investors lose confidence in government money-printing experiments”.

Jim expanded on his views in an interview with the Indian Economic Times. When asked if he had only one choice what would he invest in for the next three to five years, he said it would be silver – on the basis that “never in history has silver been this cheap compared with gold”.

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, or call us during trading hours on 1300 361 261.

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