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In the Public Interest

09 October 2020

Precious Metals Commentary

A choppy week for the precious metals. There was a surprisingly muted pop on news Trump had COVID but then gold dropped below the $1,900 level on Tuesday after Trump called off stimulus negotiations with the Democrats until after the election. It subsequently bounced back off the low $1,870s climbing back up to $1,895 as we write as Trump then signalled that he would be open to resuming stimulus talks.
usd gold price chart
The price action indicates that gold finds support on dips and we think this reflect investor uncertainty about a contested, drawn-out US election. At ABC Bullion gold and silver purchasing volumes continue to be elevated and globally money continues to flow into gold ETFs.

The World Gold Council reports that gold ETFs recorded their tenth consecutive month of net inflows during September with recent flows occurring even with gold recording its worst monthly price performance since November 2016.
gold eft flows chart
On the back of those flows, worldwide gold ETF holdings reached a new all-time high of 3,880 tonnes. Central bank gold holdings also continue to rise and are currently at levels last seen in 1993.

Nick Frappell says that his technical indicators have gold facing resistance at $1,930 and support at $1,837, so there is plenty of room for volatility as we approach the US election. Saxo Bank feel that gold will trend higher into the election if Bidden continues to solidify his lead in the race to the White House.

In a report published earlier this week, Hansen noted that markets could see a Biden victory as more inflationary, and that is what will ultimately propel gold prices higher.
Silver followed gold down but rebounded strongly off the 38.2% retracement line at $22.87 and has been matching gold, resulting in the gold:silver ratio holding steady at 79.

Regarding the gold:silver ratio, I will be following up on my August presentation with Zadel Property Education with one on how to invest in gold and silver using the gold:silver ratio.
The webinar will be held at 7:30pm on Wednesday 14th October - sign up for free here.

For us Australians, gold at A$2,650 has it back to levels seen at the beginning of COVID. Aussie gold has been particularly stable the past month, which does occur when US gold is mainly being driven by US dollar as the corresponding impact on our exchange rate offsets US price movements.
AUD gold and silver price chart
Aussie silver is up significantly since COVID in March, even with the recent drop.

Federal Budget

For all the policy measures in the Federal budget there are really only two that matter, finance wise:
  • JobKeeper extension & JobMaker – $17.9 billion
  • Brining forward the personal tax plan - $6.9 billion
All the other measures account for $18.1 billion. These COVID necessitated measure result in the budget moving from a balanced position for 2018/19 to a deficit of $213.7bn (11% of GDP) for 2020/21.

The impact of COVID on Australia’s finances can be summarised in one chart from Westpac below.
australia net debt per gdp chart
No chance of us ever getting back to zero debt, with the Government forecasting a net debt of $966.2 billion by 23/24. Certainly the historic debt level of 43.8% of GDP is COVID driven but note that our debt has been growing since the Global Financial Crisis to the levels last seen in 95/96 before COVID hit.

Australia’s $1,000 billion debt is miniscule compared to the US, who has just past the $27,000 billion mark. No chance of that ever turning around with Federal Reserve Chairman Jerome Powell saying that continued aggressive fiscal and monetary stimulus is required as economic recovery still had “a long way to go”.

Of note is that even with this massive debt load, Australia’s interest payments on that debt are lower than the last two peaks in government debt. Just as well the RBA decided to keep interest rates at 0.25% this week and continue buying government bonds.

Serving the Public Interest

We frequently mention the Reserve Bank of Australia (RBA) in these updates because of the outsized influence their actions have on the economy.

Last Friday the RBA released an unusual Freedom of Information (FOI) request that consisted of one document, an “E-mail circulated to colleagues by a former employee on resignation from the Bank”.

It is unusual because generally FOIs cover a specific issue/topic with many pages of documents but this is for one specific email. FOIs can be rejected if they are overly general given the work involved in searching for relevant documents. Therefore, for an FOI to be one single email means that someone, mostly likely an internal staff member or one tipping off someone externally, had to make a highly specific FOI request targeting this particular email.

It means that someone wanted this employee’s (Peter Tulip) reasons for leaving the RBA to be made public.

In his resignation email, Peter says that the RBA no longer serves the public interest because its decision-making process is bad, with little deliberation, failure to take opposing views into account and hostility to evidence or research.

Particularly concerning is the claim that the RBA Board “does not understand monetary policy” and that the RBA is not honest and open that there is internal and external research that contradicts the things the RBA says about “the effectiveness of policy, the effect of interest rates on financial instability, the effects of negative interest rates”.

Intellectual honesty is crucial for an organisation like the RBA, whose decisions will impact the livelihood of many Australians – there should be no place for fragile egos and confirmation bias.

We have been critical in the past about the RBA’s decisions, particularly around interest rates, and if the issues raised in Peter’s email are correct then it just gives us further unease at whether Australia will be able to successfully navigate an uncertain future.

Until next time,

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 Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.


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