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‚ÄčIs the Lucky Country out of Luck?

12 April 2019

Precious Metals Commentary


Gold continued to dance around the USD$1,300 per ounce mark, before trading lower to the exact price of this time last week ($1,292 per ounce). Silver trades just below $15 per ounce at time of writing and the Gold Silver Ratio remains at an incredibly high 85.

For gold in USD, the daily chart below shows the range we appear to be stuck in until gold breaks either side. Support seems to be around $1,280 and we currently trade just above the 100-day moving average for now.
 
CDFs on Gold
 
In local currency terms, the AUD/USD is tracking sideways at 71.2 cents, which puts gold in AUD at $1,815 per ounce and silver slightly lower than last week at $21.17 (and our pick for those with a very long-term outlook).

Platinum consolidated sideways after last week’s jump and Palladium clings desperately to the 100-day moving average but still looks at risk of a further correction.
 
CDFs on Palladium 
 

Out of Luck?


Our market update heading comes from a Jim Rickards article where he argued that Australia may face a recession this year or next, based on his assessment that:
  • Chinese investment in Australia is drying up
  • Chinese economic slowdown means less demand for Australian resources
  • property prices are declining
  • the RBA will not cut interest rates

We certainly think that the economic risks for Australia have increased, and if we could disagree on any points above it would be the last one, with an expectation of the RBA to cut rates further, but with the result failing to provide enough fire power to stop a fall in property prices.

In a recent working paper on Australian household debt, the IMF agrees, noting that the “presence of over-indebted households at both low- and higher-income quintiles suggests that macro-financial risks have increased”.

The chart below demonstrates this clearly, with the ratio of household debt to disposable income increasing from 70% in 1990 to close to 200% today.

Household debt to disposable income
The more concerning metric, in our opinion, is the red line, which is the percentage of disposable income households’ spend on interest payments. It is currently sitting on 9% and looks manageable as it isn’t too far above the long term average of 7%. However, that 9% is based on historically low mortgage interest rates and if, as the IMF suggest, “a sharp tightening of global financial conditions which could spill over to higher domestic interest rates” then that ratio will blow out and the resulting increase in households’ debt service burden will hit the economy.

By the way, it isn’t just households with a debt problem. A Bank of America Merrill Lynch study found that 13% of developed-country companies can’t cover the interest payments on their debt. So-called “zombie companies” are less productive and crowd out investment in and employment at more productive firms says the Bank for International Settlements, creating a further drag on the economy.
 
Corporate debt to GDP

In the US, that corporate debt is now more than $9 trillion with over half of it maturing over the next four years, and likely at higher rates, putting more pressure on profits and increasing the number of business zombies.

Although China is engaging in stimulus measures (including 2 trillion yuan of tax cuts) to address its slowing economy, we note that it has for the fourth month in a row reported gold purchases by its central bank, after a two-year hiatus. The other notable accumulator is Russia, which is currently 250 tonnes ahead of China in reported official gold reserves.

Such gold buying may not be entirely economically driven, but geopolitical, with Minxin Pei (a China and US relations expert) claiming that “we are entering a new era of confrontation [as] the US’s fundamental long-term interest is to stop other countries from dominating Asia, while China’s aim is to be the dominate country in Asia.”

The Belt and Road map below certainly speaks to China’s domination ambitions.

The Belt and Road map  

One response to all these risks may be think that central banks will get us out of the problem like they did in 2008. Former Fed Chair Janet Yellen suggests not. When asked whether central bankers have enough ammunition to fight the next battle, she answered:

“I’m sorry to have to say I think the answer is no. They do not have enough bullets and this is really a concern.”

Her reasoning was that on average the Fed has cut rates by 5% in response to a recession. With rates well below that now, there isn’t enough room unless the US follows other countries into negative interest rates.

We suppose if that translated into negative mortgage rates, where the bank paid you to borrow to buy a house, that would put an end to property price falls. Sounds crazy, but then Australia was unique in handing $900 in 2009 to taxpayers – QE for the people – so let’s not rule it out.



Indian Idle Gold


One government that is not in love with gold, at least not for the people, is India. It was reported this week that ministers would be meeting to consider a policy “giving gold the status of an asset class”. Sounds good, but what’s the catch?

Well this is just another attempt, over many years, to reduce Indian gold imports. The Indian government has tried many schemes that all have the objective of encouraging people to deposit their “idle” as they call it (i.e. held as jewellery or bars) gold with the government or banks. That gold would then be sold to other buyers (that is the only way it can reduce imports) with the depositor relying on a promise that the government or bank will return physical when asked.

Would you be surprised that none of these previous schemes have proven successful? The average Indian isn’t that dumb.

Are we overstating the risks? No – for example, the government’s Sovereign Gold Bonds Scheme allows for the government to go naked short gold in Rupees, as they themselves acknowledge in this press release: “the risk of increase in gold price that will be borne by the government” and they “will not be hedged and all risks associated with gold price and currency will be borne by [Goverment of India]”.

A new, and ominous, twist this time is that the asset class status means the government can justify “formalising” the gold trade and regulate it like other financial assets. Sounds reasonable, until you read this explicit statement in a news report on the move:

“The government has proposed holding gold in a depository account … Eventually, it is all in one place and government gets to keep a watch on it. Once the concept catches up, it is proposed to make it mandatory.”

Some estimate the total amount of gold held by Indians at 25,000 tonnes, about 45% of India’s GDP. No doubt any government would want that amount of gold (note: US gold reserves are only 8,133t) to be deposited so they can keep an eye (or maybe a hand) on it.

 

Bitcoin Banned


China’s government may love gold and be happy for its people to hold it too, but they don’t feel the same about cryptocurrency. The South China Morning Post reported this week that China’s National Development and Reform Commission is proposing new rules that would ban cryptocurrency mining facilities as they waste energy.

Chinese miners account for anywhere between 50% to 70% of the total bitcoin mining hash rate and are also dominant in the supply of bitcoin mining rigs, the manufacture of which would also be illegal if the rules go through.

There is a good chance the rules will be approved as China has previously outlawed initial coin offerings and shut crypto exchanges. The borderless nature of cryptocurrencies provides a way to get wealth out of the country, as while the costs of mining rigs and electricity are paid for with local currency, the bitcoins earned from mining can be sold on exchange offshore for foreign currency.

While it is possible the enactment of the ban would impact bitcoin prices negatively in the short term, Chinese miners have been shifting their operations overseas as it is clear what the government’s position is.

A negative longer-term impact of the ban may be to increase awareness of the inefficient and un-climate friendly nature of bitcoin’s Proof of Work consensus mechanism in favour of more “green” approaches, such as Proof of Stake. One would not think that climate protesting schoolchildren, nor their older millennial counterparts, would be supportive of energy intensive cryptocurrencies.

We do remember frequent reports of young people hodling their way to crypto profits during the boom. Either the lure of money encouraged them to ignore their environmental concerns, or maybe all those hodlers were climate skeptics.

To address these environmental issues, ABC Bullion has developed another alternative, which after its initial mining, has no further costs involved as it is transferred peer-to-peer in a decentralised manner. Unlike bitcoin, there are no pseudo anonymous ledger records that can be interrogated, giving absolute privacy, and it is also 100% hack proof.

What is this great new alternative currency? Why, physical gold, of course. Was that a bit anticlimactic? Yes, we suppose “physical gold” just sounds too old-school. Maybe we should rebrand it and talk about “physcoin” and “godl” to appeal to the cryptocoin and hodl market. We have a feeling the marketing department will tell us to stick to markets and analysis and leave the selling to them.

Maybe it would just be simpler to circulate this chart from JP Morgan below, which shows gold as #2 asset class over 20 years.
 
JP Morgan chart

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 [email protected], or call us during trading hours on 1300 361 261.


Disclaimer
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.