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​In Gold We Trust

07 June 2019

Precious Metals Commentary

A huge week for precious metals this week with gold rallying back up through the USD$1,300 level to $1,333 with silver following to USD$14.88. We warned investors in last week’s update to keep an eye out for a potential rally this week due to the bullish technical setup, so it’s good to see the market reacting as expected in the short-term.

Continued trade tension and perhaps dented confidence in the Federal Reserve and their credibility sparked one of the best weeks for gold in some time. Recent commentary from the Fed suggested that they might not be able to normalise interest rates after all (old news to us) and are apparently willing to look at rate cuts if the data warrants.

On the trade war side of it there are growing concerns over global growth with the Trump administration aiming the tariff cannon at Mexico and even Australia at one point before coming to their senses later in the week.
Gold chart 
In local currency terms, the AUD/USD remains just under 0.70c, which means we enter uncharted territory with gold at all time highs in AUD. This has not dented the buying appetite of investors in physical metals, as ABC Bullion activity and volume would suggest that many think this is the beginning of a new bull market.

With gold trading at AUD$1,912 we have silver lagging behind as per usual at $21.40. Silver may be the one to watch in coming weeks as it’s moving off an incredibly low base. Some consolidation after such a sharp rally in gold would not come as a surprise, but long-term the breakout of gold prices to new highs on the weekly chart below is certainly encouraging.
Gold AUD 


Fund manager Incrementum released the 13th issue of their annual In Gold We Trust report last week. At 339 pages for the full version, it is a comprehensive review of the major factors driving gold along with interesting guest articles. We recommend downloading a copy (or the 100 page “compact” version) and at least scrolling through for the many charts.

Below we will look at some charts and topics that grabbed our attention, as even just a review of the key topics covered in the report is beyond the scope of this weekly update.


Aussie vs US Gold

Incrementum say that they find it “incomprehensible to us that even in the eurozone the price of gold in US dollars enjoys more media attention than the price of gold in euros”. In Australia we face the same issue, with the daily news reporting on the US gold price and seemingly ignoring that local investors can only buy gold with their Australian dollar income.

The big problem with this focus on US prices is that is misleads local investors about gold’s performance, often making it look less appealing. The chart below shows the AUD and USD gold prices on a log scale (so we can see historical prices in more detail).
Australian vs US Gold Prices

The two periods circled in blue are good examples of when AUD gold performed better than the USD price, with the last few years being a case in point. In 2014, AUD gold was circa $1,350 and has moved up to over $1,900 recently – a gain of over 40%. However, if you asked the average person about gold’s performance, they would probably say it has just gone nowhere.

The fall in the Australian exchange rate has been the driver behind this outperformance, and is the reason why we suggested AUD $2,000 was on the cards last week.

To be fair, the exchange rate effect can also work in reverse. In the mid 1990s (red circle), the AUD price fell while the USD price was moribund. 2003 to 2005 is another example (purple circle), with Australian gold going nowhere while US gold was moving up.

As the chart shows, generally the Australian gold price follows the US, but the takeaway is to not get too focused on the USD price and always keep an eye on our exchange rate and factor that into your investment decision, particularly during periods where market consensus is for a weakening exchange rate, as that can turbo charge Aussie gold.


Gold/Silver Ratio

We have mentioned the gold/silver ratio in the past and it continues to remain near 90, a level it last saw over two decades ago. Incrementum noted a diversion between the ratio and the S&P 500 over the past 5 years.

S&P 500 
As the chart shows, there has been a long-standing inverse relationship between the ratio (in this chart, the ratio is inverted to show the relationship more clearly) where a “rising stock market usually goes hand in hand with a falling gold/silver ratio, i.e. an outperformance of silver compared to gold”.

The reason silver would outperform gold when stocks rise is that over 50% of silver’s demand comes from industrial usage compared to less than 10% in the case of gold. So, when the economy (and thus stock market) is doing well, silver gets a boost from relatively more industrial consumption compared to gold. At the same time, stocks going up usually weakens investment demand for gold and silver, and in gold’s case, investment demand is a much bigger share of its demand than it is for silver.

However, since 2012 this correlation has broken down. Incrementum explain this by saying that in the past, expanding credit impacted on the real economy, whereas this time credit/money expansion flowed into stocks, rather than businesses borrowing for productive purposes.

In a way, this chart is a signal that the stock gains we have seen are not based on growth in the underlying economy and are more about speculation and financial engineering like stock buybacks.


Central Bank Buying

Incrementum discuss de-dollarisation and note the increase in gold held by central banks. The latter has often been presented by media, and goldbugs, as a broad-based shift to gold by central banks. The reality, as the chart below shows, is that the growth has been limited to a handful of countries, with the rest of the world, on a net basis, sitting tight.
Central Bank Gold Reserves

It is not coincidental we think that the accumulation by these six countries started after the financial crisis. Incrementum note that Russia has been the biggest accumulator, adding over 1,500 tonnes during the past ten years with China not far behind at over 1,200 tonnes.

Basel III

Early this year, a change in the risk-weighting rules for gold as part of the Basel III banking regulations was picked up by to see Incrementum note that “on closer gold bloggers and turned into a story that it would result in massive gold buying by banks and central banks. This was a beat up by misinformed commentators, so it is good inspection, however, the changes appear far less spectacular, not to say nearly insignificant”. Hopefully this will kill the story but it is a warning that some gold dealers and newsletter writers care less about accuracy and more about sensational headlines.

Investor Worldviews

We concur with Incrementum’s grouping of investors into the following three groups:
1) “Believers”: persons with high trust in the status quo
2) “Skeptics”: people who had initial doubts about the recovery but who regained trust in the status quo
3) “Critics”: people who question the viability of the status quo

ABC Bullion customers in general are those who question the status quo and have come to gold as that insurance against crises. We do agree with Incrementum that it is a shift in confidence by groups 1 and 2 that will drive the gold price, but we disagree that “this shift between the groups may occur suddenly”.

As Bron discussed in his recent interview with Kerry Lutz of the Financial Survival Network, during the financial crisis there were surges of investor buying of gold as a piece of bad news came out, but then it would level off. On the next piece of bad news there would be another surge, indicating that people had different levels of trust and thus needed more amounts of bad news to trigger them to question the status quo.

We feel that the next financial crisis will result in trust evaporating in stages, although this time it may move more quickly particularly with the “skeptics” as they would be more shocked that the underlying problems were not fixed.

Bull and Bear Markets

Incrementum chart below of gold’s performance during bull and bear markets is a good historical overview of the sort of gains that gold can post once a bull market starts.
Bull and Bear Markets
As they note, “even in its weakest upward period, gold was able to gain 71%”. We would disagree with Incrementum in saying that we are currently in a 41 month old bull market. Yes, the gold price has risen from its $1,050 bottom, but our view would be that a bull market can be called once gold convincingly breaks $1,400.

We think it can be argued that for the past few years, gold has really been going sideways, not unlike the mid-1990s, which in Incrementum’s chart is included in the 160 month bear period. Based on this view, we are still in a 93 month long bear, which is actually good news because this is the second longest bear period since 1968 so we are due for a change. Gold’s recent push above $1,300 may well be the beginning of the end of this bear market.
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 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.